Pioneer Perspectives SM

Emerging Markets: Decoupling—Myth or Reality? August 2009

Decoupling seemed more of a fantasy than a reality as emerging markets suffered a flight to quality
during the global credit crisis. However, since reaching a trough in October 2008, emerging equities
have bounced back and continue to outperform developed markets.

In this piece, John Pollen discusses the decoupling theory: is it a myth or a reality?
g The world economy is more interlinked than ever.
John Pollen
Head of Emerging Markets,
g  The scale of the impact that downturns in developed nations can inflict on the developing world
Senior Portfolio Manager, has changed.
Emerging Markets Strategy
g There will never be a total dislocation between markets globally.
g Decoupling in the sense that emerging economies and markets can grow faster than developed
markets is true and will likely continue for a considerable period.

The Concept of Decoupling An Example of Decoupling

The theory of decoupling implies that emerging-market
economies can maintain a different growth path than developed
economies. It is not clear when this notion was first expressed,
although it has become widely talked about in the global
economic and market boom times from early 2003 to 2007.
The acronym BRIC, which refers to the large emerging-market
economies of Brazil, Russia, India and China, was first coined
The chart below shows a trend that you could call decoupling –
namely, while China accumulates foreign reserves, the U.S. is
issuing more debt, a good deal of which is owned by China.
China Saves, America Borrows
5 2500
6

China Forex Reserves US$ billions

in 2001 by Jim O’Neil, Head of Global Economic Research at 2000
US Public Debt US$ trillions

Goldman Sachs. His idea was that due to rapid economic 7

development, the economies of these countries could overtake 1500
8
many of the current largest economies of the West and Japan.
This analysis is one of the first, or at least most widely known, 9 1000
theories on decoupling. It was certainly a catalyst for the concept 10
as a whole to gain traction. 500
11
In its true sense, decoupling means to separate or diverge. From
12 0
a literal interpretation, decoupling was not really taking place
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during the boom years 2003-2007. Developed-market economies

were enjoying strong relative growth compared to their averages,
and so were developing economies. However, developing
economies were growing a lot faster than developed economies.
There are two thoughts here: are people misusing the word
decoupling just to mean faster growth or do they mean that
due to the structural changes that are taking place, developing
countries can maintain a growth path in the future despite
downturns in developed economies?
US Public Debt China's Foreign Exchange Reserves
Source: Bloomberg, monthly data, 1/31/00 – 6/30/09
The old saying that “when America sneezes everyone else
catches a cold” has been broadly true in the post-war years of
U.S. economic supremacy. The boom-bust cycles also used to
be felt more severely in emerging economies, as many were very

The views expressed regarding market and economic trends are those of Pioneer
Investments, and are subject to change at any time. These views should not be relied
upon as investment advice, as securities recommendations, or as an indication of
trading intent on behalf of any Pioneer investment product. There is no guarantee
that the market forecasts discussed will be realized.
reliant on exports to the U.S. This has certainly changed in the Performance of Emerging Markets Equities vs. Developed
past decade or so since the late 1990s crises in Brazil, Russia MSCI World MSCI EM Result
and Thailand. Emerging economies are now structurally much
2000 -10.8% -26.6% Negative
healthier and have seen rapid growth in domestic markets,
thus lessening their reliance on exports to the U.S. and other 2001 -15.2% 5.1% Positive
developed markets. However, despite huge improvements, the 2002 -25.2% -9.1% Positive
world economy is now more interlinked than ever, and pain in 2003 22.8% 42.3% Positive
one large area will still be felt elsewhere.
2004 9.5% 13.2% Positive
What has changed is the scale of the impact that downturns in
2005 13.7% 31.5% Positive
developed nations can inflict on the developing world. Taken
as a whole, developing countries have been a lot more resilient 2006 13.5% 25.6% Positive
to exogenous shocks than in previous cycles although, as with 2007 2.8% 30.4% Positive
developed nations, there are still large differences within the
2008 H1 -14.0% 13.3% Positive
universe. For instance, while Brazil and Russia have experienced
severe falls in output, economic growth has fallen in China 2008 -40.1% -47.2% Negative
and India but is still positive and much higher than in most 2009 H1 3.2% 28.0% Positive
other countries.
Source: Bloomberg, Periods from 2000 – 2009 H1. Returns in local currency.

Emerging Markets: Faster Growth, Smaller Decline

The following chart shows that developing markets have
14 outperformed over the past 20 years. This period shows two
12 distinct trends. The first decade or so shows what used to be the
norm: a strong period of outperformance followed by a strong
10
period of underperformance. The second, more recent phase
GDP % Change Year-Over-Year

8
just shows strong outperformance, as long as you believe that the
6
short, sharp V-shape in mid-late 2008 was just a temporary blip.
4 Indeed, looking at the trend line, it is now back on the same
2 trajectory as it has been for most of the period, thus highlighting
0 that the trend has been maintained.
-2
Emerging Markets Trend of Outperformance Has Continued
-4
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China India Eurozone US GDP 220

Returns Rebased to 100

Source: Bloomberg, quarterly data, 3/31/00 – 3/31/09 200

180
160
A Perspective on the Markets
140
Emerging-market equities initially held up well relative to past 120
performance in the unfolding of the 2008 credit crunch. For
100
instance, they outperformed in the first half of 2008. It was in
80
the second half of 2008 that emerging equities underperformed.
60
This was when analysts started saying that it was the end of the
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decoupling phase that had seen emerging equities outperform

developed markets since 2001.
MSCI EM Relative to MSCI World ($)

Source: Bloomberg, 6/30/89 – 8/14/09

2 Pioneer PerspectivesSM | Emerging Markets: Decoupling—Myth or Reality?

The recent period of underperformance for emerging equities
was relatively short: underperformance started in early July 2008.
However, since bottoming out in this down cycle on October 27,
2008, emerging-market equities have significantly outperformed
developed markets: 87.7% compared to 27.6% as of August 14,
2009. Developed markets continued falling for many months after
emerging markets and only bottomed out on March 9, 2009.
Even since then, emerging markets have still outperformed
(75.7% vs. 54.5% as of 8/14/09).

Conclusion
In conclusion, both from an economic and market perspective,
there will never be a total dislocation between markets globally,
as the same trends and forces are in play, albeit to different
degrees. In addition, decoupling in the sense that developed
markets will fall and emerging will go up is not true and never
has been. However, decoupling in the sense that emerging
economies and markets have grown faster than developed
markets, helped by rapid domestic growth and intra emerging-
market trade, is certainly true and we believe is likely to be so
for a considerable period.

MSCI World: The Morgan Stanley Capital International (MSCI) World Index
measures the performance of stock markets in the developed world.
MSCI EM: The Morgan Stanley Capital International (MSCI) Emerging
Markets Free Index measures the performance of emerging market stocks.

The views expressed regarding market and economic trends are those
of Pioneer Investments, and are subject to change at any time. These
views should not be relied upon as investment advice, as securities
recommendations, or as an indication of trading intent on behalf of
any Pioneer investment product. There is no guarantee that the market
forecasts discussed will be realized.
This material is not intended to replace the advice of a qualified attorney,
tax advisor, investment professional or insurance agent. Before making
any financial commitment regarding any issue discussed here, consult
with the appropriate professional advisor.

Pioneer PerspectivesSM | Emerging Markets: Decoupling—Myth or Reality? 3

A Word About Risk:
Investing in foreign and/or emerging markets securities involves risks relating
to interest rates, currency exchange rates, economic, and political conditions.
At times, emerging markets investments may represent industries or industry
sectors that are interrelated or have common risks, making it more susceptible
to any economic, political, or regulatory developments or other risks affecting
those industries and sectors.

Pioneer Investments is the trading name of Pioneer Investment Management, Inc.,

and Pioneer Institutional Asset Management, Inc., registered investment advisors.

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