John Christy

Does Emerging Market Success Demonstrate a Return to the 'Decoupling' Theory?

Pure economic decoupling is a fantasy. It's clear that if the US economy completely falls apart, there is no way the rest of the world can carry on as if nothing has changed.

That said, emerging market stocks can and do have very different return patterns than in the US. And the valuations, growth prospects and technical factors can all be more/less attractive than the US at any given time. In this sense, they can certainly 'decouple' from time to time.

And it's not just a short-term effect. Over the past 10 years, MSCI data (mscibarra.com) shows emerging markets up +5.5 on an annualized basis. EAFE is down an annualized -2.4% over the same stretch and the US is down an annualized -4.8%.

That's not to say emerging markets are inherently better, but it shows that there will always be some benefit from diversification. And there will always be something out there that's beating the US. You just need to go out and find it.