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"Decoupling" is the latest financial buzzword. It does not refer to the breakup of a Hollywood pair. Think less glamour but more impact.
As with much investment jargon, it can mean different things at different times, but typically it's heard when commentators debate whether emerging markets can maintain their strength as the U.S. economy falters.
In other words, just because the United States and emerging markets rose together, they need not decline together.
Of course, those who believe that emerging markets have decoupled from the U.S. have a reason to remain bullish on those markets even as America's economic news remains gloomy. Those who disagree say the gloom will spread.
It's not clear, though, that the issue is worth debating. For the concept rests on a questionable premise: that there's a coherent entity called emerging markets. In fact, looking at the data as 2008's first quarter wound to an end, it seemed that emerging markets did decouple -- from one another. That's not the first time this has happened either.
The good news: If this development is lasting, it can ease the task of investing.
Mutual fund investors could simply to entrust their international money to broad-based funds run by talented managers who can invest wherever they spot the best opportunities, rather than trying to forecast emerging-markets trends and then fine-tuning their exposure to them.
Indian, Chinese markets stumble
After astounding rallies in recent years -- during which their gains surpassed even the strong returns posted by other emerging markets -- the two giants, India and China, fell hard in the first quarter.As a result, the worst-performing international funds were those that focused on one or the other. For the year to date through March 27, the cellar dweller was Oberweis China Opportunities (OBCHX), down 36%. The list of China and India funds with losses deeper than 20% was long, helping push the Pacific/Asia ex-Japan category average to a 21.3% loss.
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But the diversified emerging-markets category didn't suffer nearly as much. It lost 11.5%, just 2 percentage points more than the core foreign large-blend category, whose funds focus overwhelmingly on developed markets. Many diversified emerging-markets funds held their losses to the single digits.
How is that possible, given that the two markets that had provided much of the fuel for the prior years' emerging-markets rallies each had plunged more than 20% this year? The answer: Some emerging markets performed far better than China and India in the first quarter.
Most notably, Mexico, Brazil, and Taiwan -- all of which play important roles in most emerging-markets portfolios -- posted only small losses or even amassed gains. Other emerging markets landed somewhere between those extremes.
Continued: The effect on investors
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