Does anyone remember the decoupling theme — a belief that emerging market equities will do well even if the developed nations are in trouble? That thesis, well remembered till 2007-08, collapsed after the fall of Lehman Brothers in 2008-end.

Since then, emerging markets have been part of the global mainstream, as developed nations such as the US, Japan and countries in Eurozone have been adopting an accommodative monetary policy to stimulate their weak economy.

However, what bothers the emerging markets’ investors nowadays is the total reliance on the US Federal Reserve Chairman Ben Bernanke’s words. Any adverse comment by Bernanke triggers a free fall of all asset prices across the globe, particularly stocks of emerging markets.

When the Fed signalled that it may phase out the $85-billion-a-month asset purchase programme if the economy improves, markets crashed. The pains were deep in emerging markets, particularly in Brazil and India.

However, when the Fed Chairman stressed that he will not pull back stimulus unless the evidence was clear that the economy and the job market in the US were improving, equities recovered.

The US indices S&P-500 and the Dow Jones Industrial Average, in fact, have registered all-time highs last week, as there were no worries on easy money.

Domestic benchmarks, the BSE Sensex and the NSE Nifty, too made remarkable recovery from the mid-June crash. They are also just a shade away from their peaks.

But now, the moot question is how long the bondage would continue, given that foreign institutional investors’ control over the BSE Sensex stocks was at an eight-year peak at the end of the March quarter.

Market experts believe that emerging markets, particularly India, will take an independent path, as domestic woes escalate on the economic front.

Nomura said: “We remain negative on India’s outlook over the next nine months due to deteriorating external finances, feedback effects from a weak Indian rupee (and likely policy responses), a poor growth outlook and the election cycle.”

According to a Bank of Merrill Lynch fund managers’ survey, investors are showing extreme pessimism toward China and emerging markets, with EM now seen as the greatest potential threat to financial market stability.

“A net 70 per cent of investors rated EM risks as above normal, the highest on record,” the survey had pointed out.

Sustained, high ‘quality’ fiscal consolidation remains vital to make space for India’s rising investment needs, reduce ‘twin deficit’ concerns and ease fears over external sustainability, said BNP Paribas. Financing a higher proportion of smaller external deficits with more FDI is also crucial to generate the investment needed to stop India’s demographic ‘dividend’ becoming a ‘curse’.

“The now loudly ticking electoral clock and the demands of coalition politics suggest that further decisive progress on these key goals remains unlikely until after the 2014 election at the earliest,” summed up BNP Paribas.

>badrinarayanan.ks@thehindu.co.in

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