Thursday, June 18, 2009

DECOUPLING THEORY-REALITY CHECK


Decoupling theory, as the name suggests, decouples emerging world markets from US markets. The followers of this theory believe that “because of the strong GDP growth of many developing countries, especially of China and India, their markets will chug along even at the time of USAfter the first symptoms of recession of US stock and other financial markets, many investing firms and funds changed their focus to emerging markets of Europe and Asia. Decoupling theory is postulated in this context for assisting the firms to reap from these emerging markets, but the validity of this theory is arguable.The theory was pretty right till the end of last year, but things have changed considerably in this year. recession.”

Now with the US slowdown spreading across the globe coupled with a declining dollar, advocates of the decoupling theory are debunking their claims.Most Asian markets are now on big recession after the crash of Dow John’s. Indian, Chinese and Hong Kong markets fell considerably in the recent past.In the globalized world no country can remain isolated and hence developments taking place in one part of the world have their repercussions on the other part of the world and capital markets are no exception. The Indian capital market is also showing bearish trends with banking stocks moving down in recent times.

After the first symptoms of recession of US stock and other financial markets, many investing firms and funds changed their focus to emerging markets of Europe and Asia. Decoupling theory is postulated in this context for assisting the firms to reap from these emerging markets, but the validity of this theory is arguable.
The major drawback of Decoupling theory is that it does not consider the multiple economic relationships and globalization trends. Although the trades among Asian countries grown tremendously, the major trading partner for all major Asian countries is still United States and any recession in its economy will lead to recession in all these countries, although the effect may vary.The coupling thus still exists and the same can be said about the near future as well.

Courtesy:1>Dr Salma Rizvi,MBA,PhD,Lecturer(Finance)Amity Business School
2>Amarendra Chowdhury,MBA,Phd,Consultant,Citi-India

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