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Stock Markets Overseas Heat Up

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Some strategists look at the recent price action of commodities and stock markets overseas and conclude that the decoupling theme remains intact: that is, foreign economies will continue to grow even if America’s economy falters.

For evidence, market pros cite the rise in commodity prices, with the CRB raw industrials sub index up yesterday for the 8th day in the past 9 to less than 1% from its record high. Yes, some of this is definitely related to currency debasement, strategists say: as the dollar slides, dollar-denominated commodities become cheaper for foreign buyers.

But that’s not the whole story, says Miller Tabak’s Peter Boockvar. The strategist points out that the emerging market thesis of a growing middle class remains the dominant theme as 85% of the world's population is not in the developed world.

Some think decoupling isn’t possible, says Boockvar, especially after what was seen in '08-'09 when it badly failed, but check out stock market closes overnight.

The South Korean stock market closed at the highest level since May 2008; the Sensex at the highest since Jan 2008; the Thai index at the highest since 1996; Jakarta index at an all time record high; Singapore Straits at just shy of highest since June 2008; and the Philippine index closed just below a record high.

Other market pros remain unconvinced, however.

Dr. Gary Shilling of A. Gary Shilling & Company argues that most foreign economies continue to depend directly or indirectly on exports to the U.S. to fuel growth and, with U.S. consumers retrenching, those countries are in trouble.

What about the counter argument, advocated by other investment gurus, that emerging nations understand this dilemma and have adapted accordingly, changing their business models by trading more with each other?

As Shilling reminded us in our recent article, Strategists Debate Risks of Double Dip, these economies are adjusting but it’s a process that takes a long time. Right now, these counties haven't developed sufficiently to have enough people with discretionary spending to support the economy domestically and so remained export-led.

“It’s a long process and these countries will adapt, but that’s a 10-year affair,” Shilling told us.
POSITION:  No positions in stocks mentioned.