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Decoupling: Theory vs. reality
By Conrad de Aenlle Published: January 27, 2008
http://www.iht.com/articles/2008/01/27/bus...link.php?page=1


No one can say how much has been lost by investors basing decisions on unproven strategies that work in theory, but the amount has grown significantly. As trillions of dollars were wiped off the value of global stocks last week, "decoupling" became the latest big idea to shrink dramatically when tested in the real world.

Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession. Faith in the concept has generated strong outperformance for stocks outside the United States - until now.

As opinion began to solidify after the start of the year that a recession, or something close to it, was likely in the United States, stock prices accelerated their declines, with the selling intensifying early last week. Contrary to what the decouplers would have expected, the losses were greater outside the United States, with the worst experienced in emerging markets and developed economies like Germany and Japan.

Exports make up especially large portions of economic activity in those places, but that was not supposed to matter anymore in a decoupled world because domestic activity was thought to be so robust.

Decoupling was all the rage early last year when international financial markets all but ignored the increasing turmoil in the U.S. economy and stock market. Investment advisers point out, however, that the segments of the U.S. economy that were showing wear and tear then were those to which the rest of the world would never be heavily exposed. That is no longer true, they say, and markets are responding accordingly.

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Decoupling: Theory vs. reality

"Decoupling is yesterday's story," Stuart Schweitzer, a global strategist at JP Morgan Private Bank, said. "Last year, when the U.S. slowdown was driven almost entirely by housing, it made sense that the rest of the world kept right on going. Housing is a domestic story, plain and simple.

"The nature of the slowdown has changed in two key respects. The credit crunch that began in midsummer is not just a U.S. phenomenon; the rise in risk aversion is global and will have an impact on credit terms and availability everywhere. And we're finally seeing evidence that the U.S. job market is losing steam and consumer spending is slowing."

True believers in decoupling have ignored another theory that appears to be logically inconsistent with it, has been popular for far longer and, most important, has been shown to work in real life. Remember globalization?

"If anything, global interdependence of economies is rising, not falling," said Jeff Applegate, chief investment officer of Citi Global Wealth Management.

"The notion that the U.S. can go into recession with no negative knock-on effect in the rest of the world doesn't hold up."

Andrew Foster, head of equity research for Matthews International Capital, a specialist in Asian markets, contends that it is possible for globalization and decoupling to coexist. In fact, one gave rise to the other, he said. It was only through economic liberalization that the juggernaut economies of Asia were able to grow as fast as they have, allowing for the development of conspicuously consuming middle classes.

"The irony is that these economies are more coupled with the rest of the world than they ever were in the past," he said. "That's why they're so strong, and that has allowed them to become more independent."

The new Asian consumers may not be able to compensate for all of the exports that would be lost during an American recession, Foster said, but some of the companies that served their needs might still do all right for themselves. The true decoupling may be not so much between the United States and the rest of the world as between segments of the global economy that cater to the burgeoning nouveau riche in emerging economies on one hand and most other commercial sectors on the other.

With the United States apparently tipping over into recession, Foster is looking to fill his Asia portfolios with the first type of businesses, as long as they have not been bid up to unreasonable levels already. A couple of pockets of opportunity that he finds are Chinese insurance companies and Indian health care providers.

"I like companies that don't derive their fortunes from products, services and especially commodities dominated by the global business cycle," he said, although he declined to furnish examples.

Valuation is also critical for Michael Avery, chief investment officer of Waddell & Reed and a professed believer in decoupling - up to a point. He noted that the concept began to pop into the heads of professional investors, including his, during the last U.S. recession, in 2001-2, although it had not yet achieved buzzword status.

http://biz.thestar.com.my/bizweek/story.as...092&sec=bizweek

The Reality is that US companies that have businesses outside US such as IBM and Microsoft tend to do better than if they were to depend on US alone.

Decoupling of Market is different from that of the economy.

Decoupling of economies , though not 100% , but it is going towards that direction.

Fund Managers may have to sell down Asian Markets in order to meet heavy redemptions in US as always in the past. Fear factor - all over the world plays an important role for the sell down. Fear that US is to take a longer time to recover and going into depression later ? This theory is new and not tested in depression period. People start to accept that US is going into recession, but how bad is going to to be ? That is the fear in the mind of people.

Year 1993 was the Super bull run for Malaysia, whereas US was doing quite badly.

Year 2000 and Year 2001 , US was having recession but not in Asia. China is still expected to grow around 10% a year and now US is oledi in recession ( as per Citigroup). China can still afford to pump in money into their economy if not for the inflation factor. Foreign funds still have a big hand in China stock market ( Via HK). HSBC in Hk is said to link to Sub prime issue, so correction is quite logical in that sense. In reality, US companies view China as an important market to expand their businesses.


US is losing slowly as the most powerful economy in the world. That is the reality.

Do not take the report from the west as 100% true, they may have a hidden agenda. They did that during the Asia Currency Crisis. They bought a lot of good companies in Asia at "lelong" prices. That is the reality.

Malaysia for many years promoting the idea of Asia Economic Grouping , but US strongly objected for what ? It is the decoupling theory likely to be true.

The myth is - US is facing large current accounts deficit and will be getting worse and Asia governments are building up bigger foreign reserves. So the myth is can US keep going on "borrowed" money forever ?

The West whenever in trouble, is their intention to drag everybody in. However when Asia is in trouble, then the west will isolate themselves from Asia. The problem with Asians is they take words given out by the west as absolute truth.

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Added on January 28, 2008, 12:35 pmFalling markets hammer two Chinese hedge funds
Fri Jan 25, 2008 3:42pm EST


By Dane Hamilton

NEW YORK, Jan 25 (Reuters) - Two of last year's top-performing China hedge funds, Golden China and Golden China Plus, hit rough patches this month as Chinese equities fell, but the manager said it would pour $20 million into the funds in a vote of confidence, according to a letter to investors.

Both funds are managed by Hong Kong-based Greenwoods Asset Management trader George Jiang. The $580 million Golden China was up 100.29 percent in 2007, while the $125 million Plus fund was up 31.06 percent, according to the letter, which was dated Jan. 23 and obtained by Reuters.

But the recent sell-off in Chinese markets, on worries about fallout from the spreading U.S. subprime mortgage crisis and fears of inflation, pushed down performance by more than 10 percent for both funds, the letter stated.

"So far in January, we are penalized by the sharp sell-off in the market and the fund suffered a double digit drawdown," Greenwoods said in the note. A drawdown is a decline in asset value.

Greenwoods expressed confidence in the market and its strategy, however, saying "we will increase our investment in the funds by no less than $20 million" by Feb. 1, 2008.

"Chinese equities are oversold under the present market condition, and it's not the time to cash up," the note stated. "On the contrary, it's a great time to take advantage of investors' fear and market irrationality to seek those mis-priced quality companies."

The two Golden China funds aren't the only hedge funds that outperformed major market indices for 2007 on gains from stock picking in a rising market.

The 788 China Fund, managed by Heritage Fund Management of Switzerland, surged 114.74 percent in 2007, with a 4.95 percent gain in December alone, according to a note to investors. January performance wasn't available. Continued...

This post has been edited by SKY 1809: Jan 28 2008, 05:57 PM