Experts have said for years that emerging markets were breaking free of their lock-step movement with developed markets.
But the market crisis changed that view. While few believe that emerging markets are as dependent on developed economies as they were 10 to 15 years ago, these developing economic engines are not yet strong enough to pull the world — or even themselves in some cases — out of recession on their own.
But contagion also goes both ways, and developed economies at least sneeze if not fall ill themselves when emerging markets catch a cold.
“The decoupling argument is (based on) a historical view that dictates that the (U.S. and other) core markets impact the peripheral, emerging markets, but not the other way around,” said Jerome Booth, London-based head of research and a member of the investment committee at Ashmore Investment Management, which had $31 billion in assets, mostly in emerging market debt, under management as of Sept. 30.
“The reality is that the periphery impacts the core (markets) in a big way.”
Prior to the economic crisis, the notion that emerging markets perform independently of the G7 economies — led by the U.S. — had been growing for a while.
Following the subprime mortgage debacle that emerged in the summer of 2007, some investors still believed that certain emerging markets — with its their robust growth and giant reserves — would be cushioned against the painful blows dealt to developed markets.
But the September 2008 collapse of Lehman Brothers Holdings Inc. dispelled any such wishful thinking as emerging markets also nosedived in the aftermath.