21 Sept 08

The theory of decoupling has lost its popularity from the current credit crisis. Along with plummeting stock prices in developmed markets, share prices in emerging markets have plunged even more in the past week. The main bourses in Russia suspending trading for three days in a row after its market fell by a record 26%. The stockmarket in China, India and Brazil has also dropped by double-digit this week. As investors panicked and confidence were lost, governments were quick in their actions. The central bank of India aggressively sold its foriegn-exchange reserve to support the rupee. And soon after Lehman Brother's collapse the China government cut the benchmark lending rate, by 27 basis points, for the first time in six years, to support its financial sector.

Not until recently, equities in emerging market are deemed as one of the best investments. Supported by high growth rate and massive current-account surpluses, share prices in emergeing countries traded at an even higher multiple of earnings than developed countries last year. Trillions of capital has been poured into the emerging markets since 2000 as global growth remains strong. A bull market in commodities has drawn a lot of hot money into resources rich countries like Russia, India and Brazil. However, the trend seems to have reversed this year. $67 billion of capital has flowed out from emerging countries this year, compared with inflows of hundreds of billions of dollars in the previous five years. Stockmarkets of emerging coutries are also the ones that have falled the most so far this year, with many of them now trading at less than half of the peak.