De Coupling 2.0Vibrant stock market at a time when UK has witnessed worst economic decline in last 50 years and Japanese unemployment is at 6 year high and various others depressing news from all over the developed economies has brought back the word de coupling which was forgotten for over last one and half years. In the year 2007 when the world dreaded big economies to fail, developing economies like India and China were basking over this theory. However when the crisis actually happen all the economies came tumbling down. The failure was prima facie due to collapse of global credit market, destocking of firms and tightening monetary policies by governments of various countries due to inflationary trend immediately before the shocks fell. The theory that did not work initially has higher chance of working now as global shocks are abating. Asian emerging economies China, India and others are expected to grow by 7%, than European and other nations which are intertwined with American economy which is expected to be flat for forthcoming year. Government activism with monetary and fiscal stimuli has helped this resilience. China, Japan, Singapore, South Korea, Taiwan and Malaysia have all announced fiscal package of more than 4% of GDP for 2009. The market is antiphonal and exhibits positivity to the steps taken by government. The pump-priming should work better in Asia than in America and Europe as they have to suffer with the pain of process of de leveraging for quite some time. Before we discuss more about the validity of de coupling it is better if we check whether market is suggesting the same or not. It is widely accepted that market signals before actual economic data starts suggesting any economic theory.
Regression analysis carried out on the weekly Sensex value with those of Dow Jones index suggest that market is already sensing de coupling and behaving so. As the table suggest alpha (de coupling element here) during current calendar year has tripled than what it was during global boom period of 2003-2007. The reason behind this excess alpha has been widely debated including higher creditworthiness of Asian individual concomitant to their saving habits. It is common wisdom that after every crisis there rises a new opportunity. Also as world economic history suggest the supremacy of every economy has lasted for a cycle length of around 100 years.
Whether globally there happens L shape or V shape recovery or W shape recovery, how this de coupling will pan out will be interesting to watch and will shape how our market behaves in the years to come.
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