Most of us are by now familiar with the word Decoupling. While most intelligent minds in the financial world have expressed their opinion on it, I still want to put my perspective into picture. When we see Indian Economy 20% of our GDP is generated form Exports. Out of that if we remove low value added products like petroleum refining and gems and jewellery polishing and Low value IT services. Therefore only 12% of our GDP which constitutes of high value exports will be adversely affected. Out of total Exports US accounts for almost 20% of our total exports. So we can see that only 2.4% of high value added Indian exports are dependent on US. Now even if we are expecting a slow down in US markets, the demand for only these exports will be adversely affected which accounts for only 2.4% of Indian GDP. (Source UBS report)
Here it is clearly evident that Indian GDP is not that dependent of US like China or Taiwan for growth. Much of our growth is domestic consumption driven. Therefore I believe that Decoupling is inevitable. But than why there was a big plunge in Indian markets when US markets felled. The reason behind is market inefficiency. Efficient market hypothesis says that the market price all securities to perfection. The basics assumption of perfect market is that all people have same information and same interpretation. They have same risk and return expectation. This is completely wrong and is not observed in even the most developed markets of the world.
Here we must understand that Decoupling is not a short term phenomena. For last 50 years the world was dependent on US for growth and only recently the world has started decoupling form US. Therefore Decoupling is not going to happen overnight. It will take decades for the results of decoupling to be evident. And the most conclusive evidence of decoupling will the shrinking share of US GDP as a percentage of world's total GDP, while the share of emerging countries GDP will increase as a percentage of World GDP.
As I already mentioned it might take decades for the results of decoupling to be evident but markets are known for their efficiency to price future into present although not to perfection but to extreme. So the markets should have priced Decoupling by now and the value of Indian and other emerging market securities should have skyrocketed. But clearly we are not seeing this happening. And the reason behind this is it’s a long term process. It may take another five years for markets to price the effect of global Decoupling. So if you are a long term investor in emerging markets I believe that the effects of decoupling will inevitably benefit you in the long term. But in short term our and other emerging markets will swing along with US markets and perhaps the magnitude of the swing will be much more than it is in US. And this is the reason for nifty to fall by 30% compared to a 20% decline in US.
Here it is clearly evident that Indian GDP is not that dependent of US like China or Taiwan for growth. Much of our growth is domestic consumption driven. Therefore I believe that Decoupling is inevitable. But than why there was a big plunge in Indian markets when US markets felled. The reason behind is market inefficiency. Efficient market hypothesis says that the market price all securities to perfection. The basics assumption of perfect market is that all people have same information and same interpretation. They have same risk and return expectation. This is completely wrong and is not observed in even the most developed markets of the world.
Here we must understand that Decoupling is not a short term phenomena. For last 50 years the world was dependent on US for growth and only recently the world has started decoupling form US. Therefore Decoupling is not going to happen overnight. It will take decades for the results of decoupling to be evident. And the most conclusive evidence of decoupling will the shrinking share of US GDP as a percentage of world's total GDP, while the share of emerging countries GDP will increase as a percentage of World GDP.
As I already mentioned it might take decades for the results of decoupling to be evident but markets are known for their efficiency to price future into present although not to perfection but to extreme. So the markets should have priced Decoupling by now and the value of Indian and other emerging market securities should have skyrocketed. But clearly we are not seeing this happening. And the reason behind this is it’s a long term process. It may take another five years for markets to price the effect of global Decoupling. So if you are a long term investor in emerging markets I believe that the effects of decoupling will inevitably benefit you in the long term. But in short term our and other emerging markets will swing along with US markets and perhaps the magnitude of the swing will be much more than it is in US. And this is the reason for nifty to fall by 30% compared to a 20% decline in US.
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