It is a distant memory now, but when the US Federal Reserve started cutting rates five months ago, it ignited a global rally, writes John Authers in Thursday’s Short View column.
The rally was greatest in the emerging markets. The theory was that we were staging a repeat of 1999, when emergency rate-cuts made to stave off a crisis (the implosion of Long Term Capital Management) inflated a bubble in sectors that did not need cheaper money. For technology stocks in 1999, read the big “Bric” emerging markets – Brazil, Russia, India and China – in 2007.
That rally proved to be a false dawn. Developed-world stocks are back to their lows of last August. But the Brics are still partying like it’s 1999. The MSCI Bric index is up 43 per cent since the Fed started cutting.
This is a pure play on “decoupling” – the idea that the Brics have their own sources of growth, and will be relatively immune to a US recession. Those emerging markets more closely tied to the US, such as South Korea and Mexico, have underperformed drastically.
If China and India continue to grow, demanding goods as they do so, decoupling could give the world economy a lifeline.
But the evidence for decoupling is mixed. Emerging market growth shows up in demand for commodities. The Baltic Dry index, which maps demand for shipping, gained 150 per cent last year at one point, but is now 33 per cent below its peak, suggesting demand is faltering. Lower industrial metal prices send the same signal.
Even if the Brics really have decoupled, it is not an unalloyed boon. They could stoke inflation, and limit the ability of central banks to cut rates. The DJ-AIG agricultural index is up 40 per cent since May. That is a problem for Brics themselves (China tightened reserve requirements on Wednesday) as well as the US and Europe.
But for now, the Brics are still partying like it’s 1999.
