A phenomenon known as “decoupling” may explain why a few of the largest and least indebted emerging economies, and related exchange traded funds (ETFs), could be pushed along their own paths of fortune.
After the collapse of America’s economy and subsequent downfall of the emerging economies, decoupling was quickly dismissed as a fleeting idea, as described in Economist. But there are signs that some larger emerging economies are showing a healthy recovery.
China is one example after its economy showed growth in the first few months of this year. Fixed investment is accumulating and consumption is holding up. Some economists have estimated that growth in China could be up to 8% for the year. This in turn has increased speculation on commodity prices and the economic outlook for commodity exporters such as Brazil are looking better.
This newest form of decoupling, or “decoupling 2.0,” is based on two things: Larger emerging economies are less dependent on American spending. Such emerging economies are also more able and willing to respond to economic weaknesses.
The stimulus plans in China are proving to be worthwhile, and Brazil has also cut interest rates and increased spending. China is expected to see sustained growth if the economy starts to shift away from state-sponsored investments to more private consumption.
- iShares FTSE/Xinhua China 25 Index (FXI): up 19.4% year-to-date
- iShares MSCI Brazil Index (EWZ): up 46% year-to-date
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.