Reviewing decoupling in emerging markets – ING’s Bakkum explains

The concept of decoupling worked well until the first signs of recovery from the crisis kicked in, says ING IM’s emerging market strategist Maarten-Jan Bakkum.

In the best years of the last emerging markets boom, ‘decoupling’ was almost a magic word. The emerging markets were developing so quickly that investors began to see it as a disadvantage when countries had a close trade relationship with slow-growing Europe, North America or Japan. Growth could be maximised with high exports to other, rapidly-growing emerging countries in particular. Indeed, countries such as Korea and China, which successfully tapped markets in South Asia, Africa and Latin America, increasingly benefited from the rapid growth in the emerging world.

The more trade there was with emerging markets, the greater the benefit for the domestic economy. This concept worked well for a long time, until the first signs of recovery from the crisis became visible in the US and Europe, and until capital outflow and a reduced demand from China forced a growth slowdown on the emerging world. The advantages of busy trade with other emerging countries diminished as the growth difference between developed and emerging markets decreased. This process began in 2010 and has accelerated over the past year.

The fact that the upcoming world now ships almost 50% of all its exports to other emerging markets, while that percentage was just 25% in 2000 proves the success of the trade diversification during the boom years of 2002 – 2010. Now that the best growth dynamics can be seen in the US, Japan and, possibly, Europe, and the emerging world is gasping for breath after years of excessive credit growth and increased economic imbalances, however, that decoupling is more of a disadvantage than an advantage at the moment.

An optimist could say that the growth adjustment in the emerging world has already reached at an advanced stage, after the recent market stress caused by the forthcoming normalisation of monetary policy in the US. After all, average growth in the emerging markets has already dropped from 8% in 2010 to less than 5% now. Advanced does not, however, mean that growth has already reached its lowest point. China, by far the most important emerging economy, is only at the beginning of its growth slowdown. China will generate strong headwind for the rest of the emerging world for years to come, affecting the commodity-exporting countries in particular.

China is the major trade partner of these countries. They have become extremely sensitive to changes in the Chinese demand for commodities. Countries such as Brazil, Chile, Peru, Indonesia and the majority of Africa will have trouble maintaining the level of economic growth in the coming years. At the same time, the countries that the decoupling largely passed by between 2002 and 2010 will be able to pull themselves up alongside the growth acceleration in the US and the slightly slower recovery in Europe. Mexico and Poland are two emerging markets that investors should keep a close eye on in the near future.

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