Dissecting a decade of decoupling

Dissecting a decade of decoupling
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First Published: Tue, Dec 29 2009. 11 50 PM IST

Updated: Tue, Dec 29 2009. 11 50 PM IST
As the decade winds to a close, it’s useful to look back upon it with a view to spot the long-term trends.
The most striking thing about this kind of commentary is the sharp difference in tone between the commentators from the West and those from the emerging markets, including India.
While the Western press is full of talk about a lost decade, there’s a sense in India that the good times have just begun. To some extent, that difference of perception is the result of the financial crisis, with the developed economies being affected far more than the emerging markets.
Also See Varying Returns (Graphics)
But that’s not the whole story. If we look back over the past 10 years, there are clear differences between the developed economies and emerging markets that explain the divergence in sentiment.
Take the markets first.
The chart shows the annualised historical returns, in dollar terms, for the MSCI country indices over the last 10 years. The MSCI G7 index has given an annualized return of -2.4% over the last 10 years. In contrast, the MSCI Emerging Markets index gave an annualised return of 7.55%. Putting your money on MSCI India would have given an annualised return of a very respectable 12.5% in the last decade. Compare that with a negative return—of -2.89% annually—for the MSCI US index. This talk of a lost decade depends very much on where you invested in the last 10 years.
Also See Expanding Share (Graphics)
Note that it’s not just a matter of geography. The MSCI Taiwan index, for example, gave an annualised return of -2.72%, despite Taiwan being right in the middle of one of the most dynamic regions of the world. Look also at the comparatively tepid return given by the MSCI Singapore index. The action has shifted from the high-growth economies of yesteryear to the new giants such as India, China, Brazil, Russia and Indonesia.
It’s also not true that all the developed markets have done badly over the last decade. Look at MSCI Australia, which gave an annualised return of 8.15%, or MSCI Canada, which returned 7.12%. These resource-rich economies have benefited immensely from the growth of the emerging economies, which has fuelled demand for commodities.
This decoupling of emerging markets from the developed ones is based on economic fundamentals. It’s not merely the result of a low interest rate environment in the West, which has funnelled money into emerging markets, leading to the formation of market bubbles there. That’s quite clear from the economic data.
If we take the International Monetary Fund (IMF) numbers for the gross domestic product (GDP) of developing Asia at current prices and in dollars, the chart shows that it has steadily increased compared with GDP of the G7 advanced nations. The proportion of GDP of developing Asia to that of the G7 has risen from 10.4% in 1999 to an estimated 24.8% in 2009. In purchasing power parity terms, this proportion has risen from 29.8% in 1999 to 55% in 2009. In other words, the increasing returns from emerging markets are based on higher growth there.
The rise in US dominance has been accompanied by a decline in the value of the dollar. The US dollar index, which tracks the dollar against a basket of six major currencies, is now at around 78, down from around 102 10 years ago. Interestingly, the fall has not been in a straight line—the dollar strengthened from the mid-1990s to the early 2000s as the Asian crisis led to repatriation of funds to the US. But after reaching a peak of around 120 in March 2002, the dollar fell to a low of around 72 in March 2008, before spiking up again temporarily.
According to IMF estimates for 2009, China now accounts for 8.3% of global GDP in current dollars and India 2.2%. That’s a big change from 10 years ago, when China’s share of global GDP was 3.5% and India’s 1.4%.
In short, the last decade has shown that emerging markets can grow much faster than the West. Much of the growth, though, has been due to the globalisation of production, services and finance. But the crisis has shown that countries such as India and China can continue to show good growth, except for the couple of quarters that followed the Lehman bust.
While Chinese growth has been largely the result of a massive lending programme, decoupling is particularly evident for India, whose stimulus package has been minuscule.
Graphics by Paras Jian/Mint
Manas Chakravarty takes a weekly look at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com
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First Published: Tue, Dec 29 2009. 11 50 PM IST