Myth on decoupling

Recently there is much discussion on the decoupling theory between Asia and US markets. Unfortunately, it may all be a delusion. In fact, the powerful forces of globalisation make decoupling virtually impossible.

For an economy to technically decouple, it must satisfy three criteria. Firstly, it must have robust self-sustaining domestic demand - especially private consumption. Secondly, there has to be diversification in export goods and trade partners. Thirdly and more importantly, it must have policy autonomy - the ability to establish independent monetary, fiscal and currency policies.

Be aware that the slowing that has occurred in the US to date has really been in homebuilding, financial and automobile sector. These 3 sectors can be considered the main pillars of the US economy. The impending slowdown in the next three to six months will manifest in the consumer demand sector (evident from a miniscule private consumption 4Q07 forecast growth of 1%), which is America’s most global sector.

China is at the top of the external vulnerability chain. Its export sector, which rose to nearly 38% of GDP in 2006, surged at a 41% year-on-year rate in 1Q07.
A more critical point in the decoupling debate: the United States is China’s largest export market, accounting for 21% of exports. As the US economy slows, the biggest piece of China’s export dynamic is at risk.

The day will come when the rest of the world can escape the pull of the US$13.3 trillion US economy, especially when the BRIC nations mature. Until then, it is too soon to count the Americans out and the theory of decoupling will remain a case of hope over reality.

Forward looking in Y2008

Everyone seems to be talking about recession these days. But as far as investing is concerned, the 'R' word just doesn't matter. Why? Let me explain. By definition, a recession can only be confirmed after 2 consecutive quarters in which "real" GDP (adjusted for inflation) declines. So normally, the public will only know that they are in a recession 6 months after it started. At that time, it will be too late to pull out your money from equities.

Basically, successful investing is about having foresight. Search for business that have a high probability of continuing their growth and cash flow regardless of economic conditions. If you are not convinced, look at the price chart (attached picture) of the company called Whole Food. Besides that, one should also be on the lookout for corporate actions that are potential catalysts which will propel the stock price higher. To achieve excellent returns in Y2008, strong stock-picking acumen is needed. You can no longer rely on a rising tide to lift all boats.