There has been much talk about decoupling in the economic press this last year or so. The story goes something like this: even as the western economies slide into a period of stagnation or worse recession the emerging markets will continue to power ahead fuelled by massive infrastructure investment and domestic consumption. So far, so good; the US, Japan and western Europe have indeed been experiencing a difficult time these last 12 months and share prices have reflected this as investors have realized growth prospects are limited in the short to medium term. Meanwhile Asia, South America and Russia appear to have continued to achieve rapid growth rates between 6 and 12% year over year.
If a recent survey by Merrill Lynch is correct that tide has turned and investors, often those with their eyes focused most firmly into the medium term, have concluded run away inflation is for the emerging markets what the credit crunch was for the industrialized markets. The exodus from any emerging market that is reliant on imported oil, minerals and food has been dramatic as investors view inflation as being out of control. So if there is a massive flight of capital out of emerging bourses where has it gone – Europe? No, the 204 Fund managers interviewed by Merrill Lynch believe Europe is in for a tough time as the ultra hawkish ECB raises rates even as growth slows.
Apparently the smart money is on the USA, re-emerging as a safe haven where trusted institutions command a premium. Manufacturing has proved to be surprisingly robust in the face of high oil prices, a dramatic fall in construction and a tightening of credit. On average the fund managers reported themselves a net 23% overweight on US equities, the highest level since 2001, and there they intend to stay.