Emerging Markets Are Rally Decoupled from Rest of the World

The body with greater mass is having more gravitational pull”. The similar concept applies with the U.S and developed countries in general. This is because United States is the biggest economy in the whole world. Even the emerging markets (EMs) and prominently BRIC nations’ combined GDP is only 80 per cent that of the US and 40 per cent of world population. While concept still prove true, but new landscape are coming into existence. To analyze whether the decoupling has happened, we need to explore how these emerging have grown with respect to developed countries especially US economy.

Emerging market share of world’s growth have grown significantly It is evident that momentum of economic growth is shifting eastwards today, a kind of “reverse modern colonialism’. The fulcrum is moving to another side. However given the widely different growth prospects across economies in the longer run there is likely to be a very significant decoupling, underpinned by rising incomes and consumption.

Taking ‘decoupling’ under prism we will come across different facets. First, the export growth has continued to be a major component supporting emerging market. China's exports of goods and services constitute 39.7% of its GDP. Example, China’s largest exports markets are European Union, United States, Hong Kong, Japan. Second sign of business decoupling can be seen in the crude prices. Earlier, crude and other commodities prices were linked to the demand in the US. Third is skilled people and young human resource. Like advanced economies, many emerging market economies will face an ageing population. Nonetheless, these economies still hold an advantage over advanced economies owing to the high proportion of the young, which will help support growth in aggregate demand in the long term. However, today even though demand has gone down in the US, prices are still high because of growing demands and consumption in these EMs. There is expectation of rise in the size of the middle class in these nations. This indicates that a huge ride in demand will not be restricted to basic goods but impact higher-priced goods as well.

The emerging markets will have economic growth of 6.4 percent in 2011, down from 7.4 percent expected for the current year. Emerging markets will make up 80 percent of global economic growth next year. It is expected solid growth in global emerging market economies in 2011 but it will not match the current year as imports will tend to grow faster than exports. We see inflationary pressures developing next year on the back of strong growth and higher commodity prices. Central banks will react to inflationary pressures by raising interest rates and accumulating foreign exchange reserves. But the question is in what magnitude and How?

Though most fund managers targeted emerging markets as a top 2011 on account of double-digit returns, rising incomes and fast economic growth, we