The Jury Is Still Out On Decoupling

As we continue to work our way through a period of increasing economic uncertainty, I have been considering the extent to which the world's major economies are either interdependent or have decoupled. From the perspective of my own investments, the question is relevant to assessing whether the current sell down in Hong Kong and other markets is justified on economic grounds or is an overreaction which provides a buying opportunity.

Of course, trade, capital flows and other matters mean that there is a degree of interdependence. The question is how much? During the early stages of the current credit crisis, my unscientific sampling of opinion was that Asian economies were much less closely linked to the US economy than in the past. The growth of domestic economies in countries such as China and India was the most frequently cited reason in support of the arguments for at least a degree of decoupling. This was a view I was beginning to share.

A related question is the extent to which the current credit crisis will spread from its origins in the US sub-prime mortgage lending sector to other sectors of the United States' economy and to other countries. As recently as December a large number of people were suggesting that the effects of the credit crisis would be largely confined to the US mortgage market, the US housing market and the financial institutions who had taken on credit risk relating to sub-prime mortgages. In effect people were believing that there would be little impact on the "real" economy. If the view that the credit crisis will have only a limited impact on the US economy is correct, it would logically follow that the impact on economies of other countries would be even less and the current sell down represents a buying opportunity rather than the beginnings of an economic downturn.

Looking closer to home, there have yet to be any economic data released that would suggest a slow down in the local Hong Kong economy. That said, since the data would only be released well after the fact, economic statistics are not very useful for present purposes.

Unfortunately this leaves with not clear view as to whether or not the economies of the countries where most of my investments are held will be impacted by a recession in the United States. I keep coming back to two contradictory thoughts. The first is that markets have historically proven to be leading indicators of economic conditions. The second thought is that the rise of consumer spending, infrastructure investing and other trends in emerging markets have reached a size and built a degree of momentum that will provide at least a degree of support to a number of economies for some time to come.