Debunk the Decoupling Theory Atleast Now

My comments on January 20th (read post on this link) have all come true !!!

Just a day after I posted the comment, the Indian stock market fell 10% on an intraday basis. The next day it fell another 14% on an intraday basis. Though stock markets recovered a bit, they have been on a down-trend ever since.

It takes a brave man to voice opinion against the wisdom of the crowds and the events over the last few weeks make me feel vindicated.

What were those predictions and how have they markets shaped up against these predictions ?

a) During a downturn, money flows into the home market
There have been huge outflows from emerging markets. Indian and Chinese stock markets have been the worst performers this year.

b) If there is a recession in the US, no country can fully decouple itself and maintain its growth rate

There are signs of sluggishness in the Indian economy. Reports indicate that India’s Industrial Production grew by only 5.3% in January. Bank of China estimates Chinese GDP growth to slow down. Decoupling theory has now given way to Recoupling theory !!!

c) Reckless rate cuts will only stoke inflation rather providing a real impetus to growth (China is currently witnessing inflation of over 6% and the authorities have committed themselves to fight it through a tight monetary policy). Despite the heavy fall in short term interest rates in the US, the long term interest rates have refused to budge, indicating bullishness on inflation trends.

Just look at Gold and Oil. Gold has reached $1000 and oil has crossed $110 – close to a 100% gain in the last 12 months.

How do you position yourself ?

a) Act like a hedge fund; have a long-and short strategy. Immediately switch out of stocks that are dependent on discretionary consumer spending in the US. You can buy into emerging market equities on dips, but buy into those stocks which have lower export component and are fairly valued. Don’t buy stocks whose valuations are can be justified only by a great growth story.
The Indian and Chinese markets have fallen 25% from the peak and people who bought into “growth stocks” have burnt their fingers very badly.

b) If you play commodities, play agri-commodities – the switch from food to fuel is unlikely reverse in a hurry and will help maintain an upward bias on prices.
Soybean, Corn, and Wheat futures have gained around 25 percent from the time I posted the message two months back.

c) If you are currency trader, short the dollar and the pound and go long on the Chinese Yuan. The Chinese government is not answerable to its people and will not mind paying the cost of holding a huge forex reserve (the reserve is already worth about $1.6 trillion – over 50% of its GDP). The government is in NO mood to let the currency seek its natural level and China's trade surplus is not going to disappear in a hurry
Dollar is at an all time low versus a basket of currencies and the Yuan has gained further ground against the dollar. A short position on the dollar and long position on the yuan would have given handsome rewards.