In recent years, money has poured into emerging markets amid talk of ‘decoupling’, says Lex in the FT. That’s the idea that emerging markets, notably in Asia, can shrug off weak growth in America and Europe. But emerging markets haven’t stuck to that script. They’ve always been a geared version of developed markets, outperforming the latter if times are good and lagging them in a downturn. In the latest global slowdown, even though emerging economies have continued to grow faster than their developed counterparts, their stockmarkets have trailed.
Developing-world stocks can’t decouple and neither can economies. The last recession showed that “there is no such thing as a decoupled economy in a globalised world”, says Patrick Jenkins in the FT. In a downturn, emerging markets are vulnerable to capital leaving the economy as risk aversion rises and investors withdraw cash. And the current Western slowdown, which could well develop into another recession, is affecting emerging markets through exports.
Not all the September data is in yet, but Asian year-on-year export growth is likely to have totalled 18% last month, the first sub-20% reading since 2009. Next year this figure is set to halve. The developed-world slowdown is especially bad news for Hong Kong, Vietnam, Singapore and Malaysia as exports to America and the eurozone comprise 16%-23% of GDP, notes Capital Economics.
Much is made of the fact that intra-regional trade links in Asia have increased. China’s share of other Asian emerging markets’ exports has doubled to 24% in the past ten years, eclipsing the US–EU share, says Standard Chartered. But “this picture is misleading”. Many goods shipped to China from emerging Asia don’t reflect demand there because they are then re-exported to the West. The region may have diversified, but it has not decoupled. Indonesia aside, “Chinese growth is an insignificant source of growth in Asia-Pacific economies”, says Standard Chartered. EU and US growth is, however, “very important”.
So there is “no escape” for Asia from weaker developed-world growth, as Morgan Stanley puts it. Throw in emerging market stocks’ tendency to be rattled by developed world news, notably from Europe, and it’s hard to see Asian markets recovering strongly anytime soon.