Are the emerging markets - that's
the big economies that are not yet in the developed club,
such as Brazil, Russia, India, and China
- are they decoupling?
And if so, are they doing so in the right way?
Now, in this chart, we see in the red line
here on this scale, the MSCI Emerging Markets Index divided
by its World index for the main developed economies of North
America, Europe, and Japan.
What that means is that whenever this line is going up,
it means the emerging markets are doing better.
Their stock markets doing better than the developed world.
Whenever it goes down, they're doing worse.
Meanwhile, the green line on this scale
is just the MSCI World itself, the measure
of those big developed world stock markets.
When it's going up, things are going well for them.
When it goes down, such as during the crisis,
things are going badly.
Now the theory, back about 15 years ago,
was that emerging markets were ready to decouple.
That meant that they could start selling stuff
to their own people, to their growing middle classes,
rather than to the developed world,
and that meant that they could grow even if the developed
world went into recession.
They could decouple.
But in effect, what happened was almost the reverse.
If you take a look, you can see right the way
through this period this great bull
market for emerging markets.
They outperform by more as the developed world does well.
In other words, they functioned almost
as a geared play on the developed world,
not as some kind of an alternative to it.
And similarly, once you get the crisis,
so emerging markets, where it is not where the crisis started,
do even worse than the developed world for a while.
Now, there's a period of turmoil,
obviously, during the crisis, but then in the last few years,
you've seen exactly the opposite phenomenon.
You've seen emerging markets steadily
do worse than the developed world,
even as the developed world has done well.
That is decoupling, but exactly the wrong kind
if you're investing in the emerging world.
Now, why is this?
Obviously for the last few months,
since maybe around about here, there
has been the risk of a trade war, which people think,
I think correctly, will hurt the emerging world more
than it hurts the developed world.
But perhaps the most important relationship
is with the dollar.
In broad terms, the rest of the world's currencies
went like this against the dollar.
The dollar had a pronounced period of weakness.
The rest of the world currencies gained.
You then had a period of turmoil during the crisis,
and then you had a pronounced long period of dollar strength
where other people's currencies weakened against the dollar.
And emerging markets did poorly compared
to the developed world.
In the last year or so, you saw a brief period
of dollar weakness for most of last year,
and you've seen the dollar strengthen a lot this year
again, directly in line with emerging market performance.
Broadly speaking, there is a strong perception
that a strong dollar is bad news for emerging markets.
That, in turn, means that even though emerging markets now
look very cheap, this may not be the time to buy them,
because you need to rely on a weaker dollar.
Which means you need to hope that the Fed isn't going
to raise rates as expected, or that we're not
going to get the tariffs that many people expect from the US.
As it stands at the moment, the emerging markets
have not decoupled from the dollar, and that is a problem.