To decouple or not to decouple? This is the question everyone is asking nowadays, as most people remember the period about 10 years ago when the emerging markets went from one financial crisis to another.

On the other hand, over the past few years, emerging markets have done extremely well in terms of macro-economic performance as well as financial market outperformance. As the US is still the dominant global economic power, and emerging markets are still considered very America-dependent, uncertainty is growing over the possible negative impact of a US recession.

Let us be straight and clear that it is unavoidable that a severe US slowdown, let alone a severe recession (or even "stagflation" as inflation pressures are increasing worldwide), will be felt globally, be it developed as well as emerging markets. And we can expect that over the next few weeks earnings expectations in many emerging markets will be downgraded as a consequence.

But we can say as well that over the years, with the entrance of China (and India) on the world economic playing field, together with the reforms and restructuring that have taken place in many emerging markets, the dependence of emerging markets on the US has diminished considerably.

Our arguments for a growing economic decoupling are based on some studies:

  • More than half (and almost 75 per cent) of global growth nowadays comes from emerging markets.
  • Exports from China to Europe have overtaken those to the United States.
  • Chinese exports to emerging markets are growing more strongly and are becoming more important than those to developed markets.
  • Emerging market exports to China have overtaken exports to the US in recent years.
  • Emerging market domestic demand is becoming more important. So in economic terms, demand from the large emerging markets (BRIC and Middle East) are as important as the US for emerging markets' exports.

During the crisis in the late nineties, most emerging markets were obliged to reform and restructure, and have de-leveraged in a meaningful way (on a country as well as company level), and as a consequence, (and with help from a very stimulative global monetary environment and a weakening dollar) most markets are in a very sound fundamental situation in terms of their fiscal, debt and current account position, and are much less vulnerable in case of a global downturn.

We can even say that most emerging markets are in a better position than many developed markets in terms of macro-economic fundamentals.

This means as well that most emerging markets have over the last decade invested less in infrastructure, and this is now creating bottlenecks to further economic growth and a massive pent-up demand for infrastructure investment. India, planning to invest at least $500 billion in infrastructure over the next five years, is in this regard a good example.

Economic decoupling from the US doesn't mean financial market decoupling. Despite the outperformance of the emerging markets in the last five years, we have also seen that the correlation among global markets has increased a lot.

As the valuations gap was closed in 2007 the emerging markets' bull market, together with a strongly increased level of subprime-induced risk aversion, make it clear that emerging markets are more vulnerable to profit taking.

But we still are convinced that further corrections will create strong opportunities to accumulate emerging markets exposure.

- The writer is senior asset manager (emerging equity markets), Dexia Asset Management.