A meme that is making the rounds is that the growth trajectory of the developed markets (EU, US, Japan etc) don’t matter, as they now make up just under half of total world economic growth, the remaining half filled by the fast growing developing or emerging markets. Therefore, even a slowdown or outright recession can’t offset the growth from the developing markets. Some call this decoupling and how Australia is well placed to take advantage – an interesting theory.
Of course reality, in the form of observable evidence, has a way of spoiling any carefully created and elegant meme. Exhibit A is this chart from The Economist (h/t The Reformed Broker), a rolling 2 year correlation of weekly price in developed stock markets, vs the entire world:
I’ll let the traders comment on what this really means. First, from long term successful commodity trader Peter Brandt:
It has come to be known as the “risk-on/risk-off” or “all-one-market” phenomena in global markets. It is a situation where seemingly unrelated markets have taken on an historically high correlation. Individual markets seem to be the proxy for all other markets.
I have witnessed periods in the past when unusually strong correlations existed for months and months. But, I have never experienced the level of correlation we have lived with as traders since 2008.
And a great comment from the Avid Chartist:
There is no such thing as diversification.
You can either choose to invest in US dollars, or something that isn’t a US dollar…. doesn’t really matter if it’s stocks or property or even gold, in my opinion, they are all correlated, to varying degrees.
Being out of US dollars and in almost anything else has been the best investment or trading option since early 2009.
Exhibit B is a chart of the German DAX Index versus India, 2 completely different economies, demographics, growth rates, composition, currencies etc, via their respective equity markets since the start of the GFC.
What does it mean for the Aussie investor or trader? If you are going to construct a share portfolio with individual stocks or through an Index ETF, you need some sort of hedging to offset the inevitable volalitility – through no fault of your picks (hopefully). Or should you ignore the Aussie market and just trade the volatility?
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