One of the popular themes I have come across repeatedly in my career is decoupling. Well, the idea that investors can reduce reliance on US assets by shifting into fundamentally strong Asia and emerging economies. It is a theme that sounds attractive. Invest where growth is faster and valuations are cheaper.
After 30 years in the markets, I have heard this theme sold in many forms. In fact, I have written about this in my other publications long before this blog even had a chance to make its debut.
From my experience, the US still sets the tone for global markets. When Wall Street “crashes”, the rest of the world usually follows. Correlations spike, and risk appetite vanishes. Even the strongest Asian and emerging markets struggle to stand on their own. In fact, exposure to these markets tends to perform best when Wall Street is either trading sideways or moving upward.
Over the years, I have met people who shared their losses in products focused on Asia and emerging markets, often sold to them under the banner of diversification and uncorrelated growth. In reality, those portfolios just added more volatility and vanished when real protection was needed.
Meanwhile, the sales brokers or bankers walked away smiling with their commissions safely decoupled from returns or losses. I still remember a top banker who consistently topped her hefty sales quota simply by repackaging the decoupling story and selling it to her wealthy clients like it was the next big thing.
Oh no, not again! With headlines warning of tariffs, political theatre in Washington, the supposed end of US exceptionalism, capital fleeing American markets, and a weakening dollar, macro risks are getting real and the decoupling story is once again being dusted off and paraded like it is a brand new idea.
Decoupling always makes for a great sales pitch especially in times of uncertainty. I’m not here to pooh-pooh Asia or emerging markets but in real-world market action, things are rarely as straightforward as the story suggests.
Depending on your risk profile, there are many ways to achieve real diversification, usually by combining well-structured strategies, rather than chasing the latest decoupling trend like it is the hot new dance move.
Here is another thing – the US capital markets are still the deepest, most liquid, and most transparent on the global stage.