Decoupling Revisited: Can the BRICs Really Go Their Own Way?
The paper contrasts the changing nature of BRICs and then examines the decoupling issue. The ability of BRICs to deflect external shocks seems to be more heavily related to improvements in their crisis prevention systems and better macroeconomic management, which has generated hardier economies. While significant evidence of decoupling from the developed world is found to be limited on both the macro and financial fronts, we see a marked shift in BRIC trading patterns away from the US to Eurozone and developing economies, which provides some degree on immunity from the US business cycle. Additionally, investment grade ratings are helping in reducing their riskiness and conferring a degree of immunity from market frenzy when isolated problems erupt such as in Dubai and Greece. As such, BRICs are being regarded as a more stable and secure asset class than seen earlier.
The paper highlights the following BRICs features:
The nature of BRICs and their high growth prospects.
Improvements in macroeconomic management that have yielded better balance sheets and reduced their earlier vulnerability to crisis.
Resilience in the face of the US credit crisis was no accident, but a deliberate policy stance adopted on the heels of the 1997-98 Asian crisis.
Resilience may be popularly interpreted as decoupling, but trade and financial sector linkages have strengthened via globalization.
Openness' indicators show more interdependencies, but a decline in the relative importance of US indicates a growing degree of disconnect from the US business cycle.
The linkages between global financial markets and the transmission of "fright" is accessed via an examination of co-movements in equity markets, bond markets, credit default swaps and implied volatility measures, or VIX.
Swift transmission of fright factor is seen, but financial markets are according greater respect to BRICs asset classes, consistent with their investment-grade ratings.