Decoupling - a brief look 1 year after the Credit Crisis

In August 2007 the financial world was rocked by the beginning of what we now call the credit crisis.

The overleveraged American financial system was beginning to unwind - and threatening to take the rest of the Western world with it. In recent decades, it was said that whenever the US sneezed, the rest of the world caught a cold. This time was supposed to be different. This time we had the BRIC countries of Brazil, Russia, India and China to pick the slack. These four countries (most notably Brazil, India and China which are the focus of this entry) were decoupling from the US economic cycle and could forge ahead on the back of the consumer driven demand of their emerging middle classes. If enough Chinese were buying enough of their own products (and importing from other Western countries), we'd get a nice V shaped global recession at worst - or perhaps none at all.

So how have things fared between the BRIC's 1 year on? Well, decoupling as a theory has largely been laid to rest - at least in this economic cylce. I heard one of the best criticisms I've heard about the decoupling theory was by Stephen Roach of Morgan Stanley in Asia... His point was that the US consumer spent 9.5 trillion dollars last year while China and India's consumers had a combined total of 1.65 trillion. These rations will very likely change in the future (think 2020), but for this business cylce at least - it doesn't look as rosy.

There are of course many analysts who will continue to argue the point but the weight of opinion - best measured perhaps by the markets - would appear to think differently. The following shows the relative performances of the BRIC countries (minus Russia) vs the S&P 500 since the credit crisis began.

China's green line on here is probably the most stunning. Once soaring high from a massive influx of foreign money, the index has fallen by an astonishing amount of over 50% from the peaks it set towards the end of last year. India, while not suffering quite as badly has also suffered a wild correction. Even Brazil, the recent recipient of an upgrade to investment grade status and probably my favourite BRIC country (in terms of the amount of reading I do on its economic situation) has suffered badly. Brazil's own downturn has coincided with the correction in the commodities markets as of late - and I'll cover that a little tomorrow. Interestingly, the S&P and India have both risen which has done nothing to slow the other two markets' declines.

The following shows the relative performances from the past year and a bit in a different view:

It's clear from these bars that the S&P has suffered badly, with China down more than a third on any investment made in July 2007 (I shudder to think of the people bought near the top later last year and are still holding). India and Brazil look in much better shape from these bar charts but the relative performance masks their overall performance in the past few months.

So - decoupling?

As always history will be the judge but right now, it would appear that the markets believe our fates are still tied to the US.