This is a big question now among economists, academics and financial analysts. What was once a prevailing view that as the U.S. financial system goes so goes Europe and other foreign markets, a growing body of evidence is now pointing that not all corners of the global economy may be as dependent on the U.S. economic coattails as before. The emergence of the Dragon (China) and the Elephant (India) as economic powerhouses, in particular, is calling into question the theory of "coupling" among foreign markets. According to Morgan Stanley Research, the equity markets of India and China are the least sensitive to the prices of U.S. equities. The same holds for broader economic sensitivity as well. Conversely, Canada and Latin America are the strongest linked to the U.S. on both measures, as expected.
The recent performance of global equities demonstrates that stock market performance and broader economic performance are not always tightly linked. Despite the recent toils of prices on many exchanges around the world, several economies continue to show resiliency and strong growth. Right now, the U.S. is suffering from both a decline in domestic equities and growing concerns over a recession driven mainly by the credit crisis. There are even concerns that rising food and fuel costs could be putting inflationary pressures on the economy which typically (in theory) does not coincide with economic downturns. Outside the U.S., particularly in Asia and the Middle East, certain economies are growing quite rapidly.The view of some on Wall Street is that the rest of the world, particularly the fast growing emerging market economies, will slow a bit but should be fairly well inoculated from the recession cold that has hit the U.S. As such, many institutional investors are more weighted right now in foreign and emerging market equities (especially the BRIC economies) over those in more developed markets.
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