Decoupling During a Downturn Difficult To Predict

I am reading more and more commentary that says the decoupling idea - that is, that emerging markets would be immune from a recession/bear market in the U.S. - will not pan out, and that these countries will go down right along with the U.S.

I don't think it is as simple as decoupling will work versus decoupling won't work.

The equity market in China is in the middle of a decline of some magnitude. The decline plays no role in the crane count in China. The building and infrastructure modernization will continue if we do in fact have a bear market. I don't know if this continued spending will help stocks or not, but the underlying fundamentals could stay very healthy.

As we look at different countries, they each have their thing (or things) that make them tick. During a U.S. event some of these places will hold up just fine.

The story in Vietnam seems like a candidate for ongoing health, a type of place I have previously described at being in its own world.

During the big bear market at the start of this decade, Australia was able to pull away and recover much faster than most other markets. That is the thing to this entire issue. There will be some markets that weather a U.S. downturn better than others. While this is obvious, it is also true.

Which countries will be the ones? I mentioned that Australia worked on the last go around. Norway not so much last time, but if oil stays high (above $80?) it might be a candidate. Norway obviously is a surplus country.

What about another fave of mine, Iceland, which is a deficit country? A reason to think not, is the extent to which its banks participate in the global financial scene. Part of the bear case now is not being able to access capital. This threatens Iceland in the short term. A reason to think yes, is the move afoot to bring energy intensive manufacturing and data storage to the country to take advantage of the very cheap geothermal energy. Weighing the two, I'd say it might not work out for Iceland over the next 18 months. The next 60 months is a different story.

How many countries are you willing to size up and allocate to in order to try to offset a U.S. bear market? Buying iShares MSCI EAFE Index (EFA) wouldn't seem to cut it - a point I make often.

This is a complex issue. I have exposure to many countries in client accounts. Some of them will hold up better and some will not, and I may not know ahead of time which will be which. Realizing ahead of time that I will get some wrong is, to me, all the more reason why I believe in using the inverse index funds to try to neutralize a big decline.

Guessing that 'Ghana will work, Belize won't, so I should sell' (these are just examples I have no idea how to access either one) seems like a much tougher game to play than just spreading across many countries you believe to be fundamentally sound. I think in that scenario you have a chance of owning a couple of the ones that will decouple.

And there will be some that do decouple, even if I don't know which ones they will be.

Comments

[DEcho:]

Beeing a Norwegian investing mainly through US listed products, I was amused to see Norway mentioned in this context. Actually I can't say how Norway will fare in the case of a US recession, but here's a few quick facts; Norway has a strict fiscal policy, putting almost all of the revenues from oil into a "Pension fund", currently amounting to about USD $450.000.000.000, which is about $100.000 per capita. Quite honestly, Norwegians don't feel these $$$ (or NOKs rather) belong to them personally, as most political parties are commited to "save for later" - we have the same social problems etc as other European contries, and Norway actually spends less money on goverment funded research than our neighbours.

I won't pretend to know how Norway would fare in the case of a US recession, but the last couple of years we've seen incredible gains - for a developed market . It's not all connected to oil; see f.ex.:
finance.yahoo.com/char...;range=20050425,200711...
Much of the growth the last couple of years have come from cheap imported labour from eastern Europe..

2007 Nov 26 10:13 AM

[Roger Nusbaum:]

thank you for sharing this. I have been a big believer in the long term big macro of Norway for several years and I think this will continue to play out positively for a while yet.

2007 Nov 26 03:23 PM

[Wiki:]

I dont see you mentioning Korea. Low Debt, High R&D Funding, New Gas finds, Korean Reconciliation and a natural partner for China and Japan. Wish to hear your comments.

2007 Nov 27 03:47 AM

[Roger Nusbaum:]

I only mentioned a couple of countries in passing in this post. Ex-US I also own Canada, Brazil, Iceland, UK, Ireland, Sweden, Norway, Finland, France, Israel and a couple others.

I don't own Korea except to the extent it has weight in ADRE. I have been wrong not to own it but something just seems off about it. I realize there is no analysis in that statement but I jsut don't want to own it.

2007 Nov 27 05:19 PM

[Wiki:]

Here is an addition to my comment.
www.rttnews.com/articl...=

2007 Dec 05 05:52 AM