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'Decoupling' questioned

The market meltdown has forced investors to take a second look at their portfolios and readjust their assumptions.

When was the last time you heard someone say he lost 20 per cent in stocks in the past six months - and still thinks he did well? Recently, in all likelihood. With markets everywhere flirting with decades-long lows and offering few hints of recovery, the question on many investors' minds these days is not who gained most, but who lost least. If you want the depressing evidence, look no further than the performance of world stock indexes since May: only three that I can find - Botswana, Tehran and Tunis - came out in the black. Just 13 indexes did better than minus 20 per cent, and 14 of them lost more than half their value. Iceland, reeling from a spate of bankruptcies, bank nationalisation, bad loans and severe market overvaluation, was rottenest of all. It lost 80 per cent.

Those statistics startle. They have even led, in some quarters, to calls for a reassessment of assumptions about investing that have been pushed upon us by financial professionals and savvy friends these past few decades. We have long been told that stock markets go up in the long run, that we can stake our retirement portfolio on equities, that as long as we have enough time to invest we have little cause for worry. We knew there were risks - the small-print disclaimers told us so - but the implicit message was always that we would be all right.

For the moment, none of that seems certain. And in some respects, the crisis has exposed the lines we have heard from financial advisers, brokers and the rest of the market mavens out there in all their broken glory. Relations between the financial world and the everyday investor are strained, and it seems to grow harder by the day to tell who you can trust with your money. With the well publicised bank failures of recent months, even cash deposits can't be called entirely safe.

Yet while the story of the global crisis is far from finished, a few lessons are already emerging for everyday investors. Mainly, the debacle has served as a timely reminder about where interests lie in the financial world. Brokers and financial advisers are merchants, and they make money by offering us products that we pay for in management fees, in trading costs and in premiums placed on share purchases and redemptions.

That does not mean the people we trust with our money are crooks - most of them they are not - but it does mean financial professionals are constantly attuned to arguments for investing, and especially those arguments that support investments that give them the highest commissions. One of the arguments, to give an example, that such professionals have advanced forcefully in recent years has been "decoupling". The idea behind decoupling is simple: if you invest in stocks in smaller countries and emerging markets - the UAE being one example - you are better off, because they do not tend to march in step with the larger developed markets of the US, Europe and Japan.

Yet if the global crisis has proven anything, it has shown that diverse markets can, indeed, all fall at the same time. "The US downturn is very much a global phenomenon, which is not surprising given the links between the global financial system," said Ali Khan, a director at Arqaam Capital in Dubai. "Hardly any financial market today that courts international capital can be isolated or immune to the current events."

As with many market phenomena over the years, decoupling may have been a victim of its own success. Not too long ago, many markets behaved as if they were in fact decoupled. Russia's RTS Index, for example, gained 225 per cent between the beginning of 2001 and mid-2002, as the technology stock crash of 2000 continued to ravage US equities. If you were an American investor with a substantial stake in US stocks, having a good portion of your money in an offbeat market like Russia would have helped you.

You might think that, looking at the recent performance of world markets, decoupling is still alive in a few places. In Tehran, for example, stock prices have gone upwards during the crisis. The same story has played out in Tunisia and Botswana. Two of these markets, though - Botswana and Iran - do not attract much trading activity, their stocks are tightly held and relatively few securities are listed. Botswana, the biggest gainer in world markets during the crisis, was also coming off a major swoon in May. "The Botswana story was helped by the fact that a market correction had taken place before the crisis hit," said Gregory Matsake of Capital Securities, in the capital, Gaborone. "Thereafter, most of the bourse's blue chips went into a reporting period and all of them posted excellent results."

"The other reason," he said, "might be the fact that our market is generally illiquid, which means shares are generally tightly held. This tends to create an over-valuation of counters as demand outstrips supply." The decoupling theory may be facing its sharpest test in its short life during this financial crisis, but other long-held theories about the market are still very much intact. Investing for the long term and riding out periods of crisis like the one under way, for example, still looks like a pretty good bet. As we learnt in the crash of 2000, markets do tend to come back. And unless you believe that business expansion and economic growth will be on the ropes for the next few decades - a doubtful hypothesis - the sweep of time is likely to lift markets back up with it.

So take comfort. The tides are shifting and stocks are getting cheaper. If anything, that means you should think about buying equities, not selling them out of fear you will lose another 20 per cent. afitch@thenational.ae

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