Growth story bolsters unfashionable theory

Contrasting views of the prospects for the global markets and the world economy provided the backdrop for one of the four sessions of Fund Strategy\'s Investment Summit, which was held in Dubai last week.

Contrasting views of the prospects for the global markets and the world economy provided the backdrop for one of the four sessions of Fund Strategy’s Investment Summit, which was held in Dubai last week. On the one hand are the relative optimists who see a moderate slowdown followed by a recovery. While on the other hand are the pessimists who predict something more akin to the Great Depression of the 1930s.

It is not hard to see why views are so different. Last week’s wave of global rate cuts and Britain’s recapitalisation of the banking system were designed to restore calm. Worryingly, what followed in the following days was anything but with the FTSE 100 falling below 4,000 on Friday after a one-day fall of 8.85%. It is becoming increasingly difficult to see what next can be done by Western governments if markets do not to start to climb soon.

By the end of the week America stated it was looking at a British-style recapitalisation of its beleaguered banks. This follows seven days in which some 2,000 points were wiped off the value of the S&P 500. In Asia things have been just as bad, with the Nikkei falling through the 9,000 barrier, prompting some commentators to suggest the theory that many of the emerging markets that were so-called decoupling from the Western world, was defunct.

This would be the easy assumption to make based on the stockmarket falls, but a look at the International Monetary Fund’s (IMF) recent growth forecasts suggests the theory may not be as dead in the water as some would argue.

The IMF forecasts global growth for the advanced economies of 1.5% in 2008 and 0.5% in 2009. In contrast the forecast for developing and emerging economies was 6.9% in 2008 and 6.1% in 2007. For China the IMF revised down its projection but it still expects growth of 9.3% in 2009.

The mistake many commentators make is to confuse the idea of decoupling economies and decoupling stockmarkets. The two are different beasts.

As such emerging markets were never going to be immune from a slowdown in the West, and this is borne out by the recent falls. However the numbers from the IMF suggest the economies are less tied together, which means the decoupling theory still seems to be valid.