Coupled or De-Coupled
Ivy Funds
Ivy Asset Strategy Fund portfolio managers, Michael
Avery, Dan Vrabac and Ryan Caldwell, address the issues
of global economic and financial de-coupling.
In our last Portfolio
Perspectives in December of 2007, we
discussed the phrase "tectonic economics".1
Tectonic economics refers to the fact that change in the developing world
is no longer a blip on the radar screen. Instead, this economic upheaval
outside the U.S. will likely be a greater driver of the global economy’s
direction. In that report we also mentioned the growing importance of
direct ties between emerging market countries, and how that changes their
behavior toward and relationship with the U.S. In this Perspectives,
we will elaborate on these ideas.
The changing relationship between developed and
emerging economies is now spoken of in terms of the degree of linkage, or
coupling, between the two.2
The idea of countries being "coupled" is the traditional or
consensus assumption that we live in a highly U.S.-dependent world. This
is usually summed up in the phrase "if the U.S. sneezes, the rest of
the world catches cold. " This is the consensus assumption, because
it was true for many years. On the other hand, the idea of de-coupling
refers to recent trends in the global economy which demonstrate that the
rest of the world has become less dependent on the U.S. If countries are
truly de-coupled (or more realistically, in the process of de-coupling)
from the U.S., then a U.S. recession may not drag the rest of the world
down with it. Because the U.S. has not had a recession since 2001, when
the developing countries were much less important, the idea of de-coupling
has remained untested until 2008. However, whether or not de-coupling is
occurring has significant implications for investors.
As we thought about how de-coupling can affect
our portfolio selections, we determined that it was important to
differentiate between economic effects and financial market effects.
Therefore, we break de-coupling down into two components — economic
de-coupling, and financial market de-coupling. Economic de-coupling
refers to the rest of the world’s GDP growth becoming less correlated
with U.S. growth than in the past. Financial market de-coupling
refers more specifically to how equity and bond markets outside the U.S.
react in response to movements in U.S. equity and bond markets. The higher
the correlation, the more they are coupled. If the correlation is low,
they can be said to be de-coupled (or at least in the process of
de-coupling)....
Read more...
1The
Elephant and the Dragon, by Robyn Meredith.
2In
this commentary, "emerging" and "developing" will be
used interchangeably.
