Are Emerging Markets Decoupling from the Developed World?

Our generation has seen and heard its fair share of bunk economic theories.
These are high-sounding theories that often are touted by recognized investors
or higher learning institutions and for that reason, they mostly remain
unchallenged. At the top of the list is economic decoupling between emerging and
developed countries. How have emerging market countries fared this year? Is
there any evidence they are decoupling from the rest of the world? And how can
investors make informed and profitable investment decisions in this particular
category? Read on: Emerging Markets Countries that are in the midst of rapid
business growth and industrialization generally are referred to as "emerging
markets." With a combined population of almost 2.5 billion people, China and
India are among the largest emerging-market countries. The theory behind
economic decoupling is that emerging-market countries can prosper and remain
unaffected by adverse financial conditions elsewhere particularly by the
adverse financial conditions of developed countries such as the U.S. Decoupling
has been heavily promoted during the past several years, especially by academic
types in the mainstream press. While decoupling might sound like a plausible
idea, the performance for emerging-market stocks this year doesnt support that
view. The Vanguard MSCI Emerging Markets ETF (NYSE: VWO ) is down more than 19%
year-to-date compared to lower-to-flat performance by the Schwab U.S. Broad
Market ETF (NYSE: SCHB ) and a 14% loss for developed stocks Vanguard MSCI EAFE
ETF (NYSE: VEA ). What about mega emerging-market countries like Brazil, Russia,
India and China? As a group, BRIC country stocks represented by the SPDR S&P
BRIC 40 (ETF) (NYSE: BIK ) are down almost 19% since the beginning of the year.
The iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY ), Market Vector Russia
ETF Trust (NYSE: RSX ) and iShares MSCI Brazil Index (ETF) (NYSE: EWZ ) are in
bear market territory, down between 20% to 40% in value. Based upon the stock
markets performance, the theory of economic decoupling isnt holding up, and
neither is the argument of a soft landing. Slowing Growth The high-octane growth
from emerging countries that analysts have been preaching is not as high or as
fast as previously thought. Chinas Consumer Price Index (CPI) and Producer Price
Index (PPI) for November were a big disappointment. The year-over-year results
were weaker than projected. CPI was ahead just 4.2% compared to 5.5% in November
2010, and PPI for the same period was 2.7% compared to 5%. Also, declines in
both Chinas CPI and PPI were worse than what economists were projecting. CPI
measures the changes in the price of goods and services bought by consumers,
while PPI measures the changes in the price of goods and services sold by
producers.