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 US, will not pan out and that these countries will go down right along with the US.
I don't think it is so 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 US 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 US downturn better than others. While this is obvious it is also true.
Which countries will be the ones? I mentioned 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 US bear market? Buying 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.
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19 comments:
I think there are two potential strategies in play, here. For existing positions, some type of hedge makes more sense than "bailing out" and changing the makeup of the entire portfolio. I like the double-shorts, like UVPIX, since I can hedge $2 with $1.
For new money, my strategy is to look for companies/sectors/countries that are already "decoupled" with the previous (heh) bull-run. This might be companies like BAM (own it), a Canadian asset management company, or AIB (don't own it), an Irish bank with exposure to eastern Europe.
It is impossible to know what will be insulated from a U.S. recession, but you can tilt the odds in your favor.
Forgive me Roger, I feel a rant coming on. ...@#&# can't stop it!
Any thesis that lacks a plausible connection to the real world, a testable cause and effect, can't even rise above the level of hypothesis much less qualify as a theory: To believe (and I use the word advisedly) that 'decoupling' is real requires, among other things, compelling evidence that emerging market intra-regional trade has become relatively stronger than, and to some degree independent of, the export economies they have built over the years;
It is to assume that the previous thesis of 'globablization' which included growing interconnection and correlation is now more myth than fact and that a recession in the USA which comprises approx 25% of the world's economic activity will have little impact on the emerging markets which in sum total, every bloody one of them combined, comprise approximately the same percentage of global GDP.
It is to assume the growth in emerging markets, China in particular, was not in large part due to easy access to cheap capital and that the sectors or asset classes such as energy and other commodities that have outperformed in recent years are not precisely those connected to capital intensive infrastructure development and that, a fortiori, increasing inability to access cheap capital will have no more effect on the emerging market economies than reduced import demand from the USA.
There's more but I'm getting a little short of breath.
Trend following is a workable technique until the larger-scale system changes. Whether proponents of decoupling are aware of the implications or not (and I would guess most are not) they are proposing a macro-economic change -- a rearrangement of relationships and the possibility of new structures forming with older structures being destroyed -- and that necessarily means: (a) current trends can no longer be relied upon and (b) assumptions about how the system will re-arrange itself are probably wrong.
OTOH if 'decoupling' is just typical sell-side bullsh*t it doesn't matter if it's right or wrong because that's not really the point of the exercise.
That aside, the low-vol rally today provided some excellent tactical shorting opportunities which I took advantage of but I'm not sticking my neck too far out either long or short in this environment, that's flat.
Roy, agreed. this is what I am trying to convey. Additionally there will be stocks that drop a lot (or this has already happened) but have no fundamental connection or more correctly very little fundamental connection.
RW, say it loud, say it proud.
The permabulls, as I hear them, keep their knuckles wrapped around the notion that the emerging mkts will continue to grow, and that not only is decoupling possible but that their growth will keep our commodities going higher. Global growth is different this time. But, like RW says, there is no empirical evidence for this.
I think it might already be too late to make sells in some of the worst affected countries. For instance, Japan may well hit a recession, but Japan's stock indices may already have priced in the worst of the downturn by sliding over 20%.
I'm going to be riding this out, because I believe that I am diversified (in terms of both countries and asset classes) and that, over my long-term investment horizon, the next year or two will be rocky but ultimately not that significant.
Of course, if I had specific needs for income or capital in the next 18 months, I'd probably take everything out and put it into TIPS.
china is up over 100 percent year to date.
roger, what world do you live in?
Is Anon 3:43 PM a heckler? PowerShares Gldn Dragon Halter USX China (PGJ) is up 58.88%, year to date. I-Shares MSCI Hong Kong Index (EWH) is up 31.44% year to date. Not quite 100%.
Whoops, my mistake, the above ETF % figures where from Yahoo finance, the performance view “As of 31-Oct-07.” As of today, PowerShares Gldn Dragon Halter USX China (PGJ) is up 43%, year to date and I-Shares MSCI Hong Kong Index (EWH) is up 29% year to date.
I tend to care more about where they are going than where they have been. you might have different priority.
Perhaps the answer lies in selecting individual stocks rather than funds.Or, cash equivalents in dollar and non-dollar instruments.
Indexing does little to mitigate failure in a true bear market, unless one uses the double shorts which come with their own unique risks.
T,
While i tend to agree with the idea of picking stocks i also think narrow based products can help in this regard too.
Might I suggest that almost no technique that is accessible to an ordinary investor will help to mitigate failure in a true bear market?
jag,
As a previous poster mentioned above...if income/capital requirements are forseen in the coming 12/18 months....sell everything and put it in TIPS...one doesn't need a high-powered computer, a trading program and a CFA to make that happen. Up a couple/3 percent when the market is down 20% would DEFINITELY count as a "win", in my book.
Jan
Jag.
Might I recommend a couple..
VIPSX
VUSXX
Good point, but the question for anyone waiting out the bear market in cash or TIPS is... how do you time your re-entry if in the long run you are committed to achieving equity-like returns? What if the stock market has already priced in a recession, and we've seen the worst of the slide already?
For all I know, the Dow could be back at 14,000 within the next three months. That could be as likely as a decline to, say, 11,000.
I am not a believer in the Decoupling theory. No matter what people say or think the U.S. is still the engine for the world. OK not what it once was .... but still a big, big influence. Look at Korea and see the edges starting to tear. They will start in that region and the rest will follow. Chile in South America (as Copper comes off) and Hungary in Eastern Euorpe.
The idea of decoupling seems to have become expressed more loudly as the pillars of this current bull run have been cracked. In fact, we all should have crawled in a hole with our gunpowder, whiskey and perhaps some SPAM when Richard Russell capitulated and became a bull.
Pillar 1: Liquidity. Oh my goodness, the money was pouring from everywhere. So much of the liquidity produced was based on derivative machinations ans structured finance (built on a sinkhole).
Pillar 2: The Fed: They really don't matter given the amount of liquidity in Pillar 1. The Fed is emasculated for the market produced so much more liquidity on its own that had very little to do with the Fed (though the Fed with it's low interest rates did spawn this bastard child of Greenspan's as folks became hungry for yield and thought Risk had headed to Disneyland. (We should know from the commercials that risk never sleeps).The collapse in the derivatives and structured finance is going to suck liquidity out of the economy--GDP will sport a giant hickey from remembrance of the "good time", but will likely have to wear a turtleneck.
Pillar 3: Global Economic Boom--Japan, Europe and the US have been slowing. Precious little air time has been given to these stories. BRIC countries still have small income per capita--and what are they doing? They're making stuff for the 1st tier nations who are slowing!
Pillar 4: The American consumer. As long as the knees don't buckle from debt, they'll buy. Knees are buckling. The Asian markets are tumbling because they know who their consumer is. They're scared. Why aren't we?
Jag.
I believe that the premise of your statement was safety from "failure in a true bear market". Three months is a downturn in the market, not a true bear market.
I think that we were maybe talking about a bear market of a year or two like the last one as a possibility.
You are right about timing the market when we are not sure where the market is going though. But if we are in a true bear market everyone will know about it.
JackS
The argument about emerging markets is farce. They can, after a decade grow independent of US economy, but not now. US is still the global driver.
So best idea? Sell half and stay in cash.
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