Global Equity Markets: Decoupling or Recoupling?

Many have come to believe that the outperformance of ASEAN markets represent signs of decoupling.

BCA Research argues otherwise and observes that the “average correlation between national equity markets has trended higher over the past decade”

They add, (bold emphasis mine)

Equity market correlation reached a peak during the 2008 financial crisis, and what eventually led to the largest global easing episode in history. But correlations still remain high and this suggests that the benefits of diversification are dwindling as investors shift between asset classes rather than between regions in response to market events. It is unlikely that the period of high correlation will end soon. The importance of macro events/drivers (government deficits, financial system health, emphasis on monetary stimulus) over the past decade has been rising and will be an ongoing feature on investors’ radar screens for years to come.

Worth noting:

1. Intensifying globalization has made financial markets more correlated and not less. Hence the above average activities seen in ASEAN or many emerging markets represent outperformance and can hardly be construed as strong indications of decoupling.

And the above dynamic seems also reflected in terms capital flows on direct investments (chart from Google Public Data).

In other words, cross border movements of capital has intensified similar to scale of improvements in world trade. I see this as financial globalization.

And as we have repeatedly been saying, the decoupling is dynamic that has yet to be proven. This will only be evident when global markets and the economies come under duress and not during inflation driven booms.

2. Since the world has been more integrated than in the past, macro dynamics will equally play a bigger role in determining trends in the financial markets or in economic developments. The relevant macro factors will perhaps depend on the proportion or the extent of a country’s exposure to world integration or globalization. And this is where the variability in national performances would emerge.