The recent turbulence in the stock, commodity and foreign exchange markets has shaken investor confidence globally. In the foreign exchange market, the turning point began in May 2014 with the Euro’s depreciation against the dollar that nearly reached parity at the end of the year.  As the table below shows, several currencies have since declined against the dollar, including the Chinese Yuan, which had held steady till the recent announcement by the Chinese government to unpeg their currency from the dollar. The Brazilian currency showed the biggest drop, approximately 38% against the dollar since January 2014.


The stock markets have also shown considerable volatility during the past year. However, it was the fall of the Shanghai index by over 40% between July 27-August 26, 2015 and the 1,800 point drop of the Dow between August 14-24, 2015 that caused major consternation among forecasters. The unanticipated declines came against a background of high expectations when most economists a year ago were predicting a rosy 2015 and 2016.  Revised forecasts this summer clearly indicate that global economies are diverging and growth rates are varying by region.

A sample of GDP forecasts by both public and private and private institutions below illustrates the revised estimates. The IMF reduced the GDP growth rate for the U.S. by 0.6 to 2.5% for 2015.


The World Bank revised U.S. GDP to 2.8% from 3.0 in June, prior to the market turbulence in July, and further downward revisions are expected.

Citibank revised the GDP for the U.S. to 2.5% for 2015, but their revision of other countries were even higher, including Russia, China and Brazil. They expect Russia to have -3.0% GDP growth and Brazil -1.7% in 2015. In contrast, estimates for India has been revised upwards as inflationary pressures eased in the second half of 2014.

Finally, Goldman Sachs predicts that the dollar and the pound will continue to strengthen while oil remains below $50 per barrel for the 2015-16 period. They are also bearish on China, predicting GDP to be as low as 5.8% in 2018, suggesting that the weakening trend is a long-term phenomenon.

As expected, the revised estimates are close, indicating herd behavior in forecasting. Very rarely do forecasts diverge significantly away from the average. This makes it all the more difficult to rely on outliers, even if they are forecasted persistently, because the timing of the event is usually a surprise.

In forecasting economic outcomes, there are essentially three projections:

  1. Global output increases as economic forces, including central bank interventions such as quantitative easing or monetary tightening, reinforce each other and provide a strong thrust to economies

  2. Global output falters into a tailspin  as economic forces negate each other and create bottlenecks and other impediments to sustain coordinated growth

  3. Global growth remains sluggish or grows unevenly as economic forces have differential impacts by country and region

Economists recognize that recommending any of the outcomes requires identifying the confluence of several external (and independent) factors correctly. The result is rarely the perfect storm (as happened in 2008) or the perfect sun shiny day (everyone’s hope) but more likely staggered upward or downward growth, depending on whether the independent and external factors reinforce or negate each other. One of the factors of relevance is the segmentation of the global markets.

Market Segmentation

Prior academic studies have shown that global markets were segmented in the 1980s, providing opportunities for diversification of portfolios. As countries began to liberalize their financial markets in the early 1990s, markets began to integrate and correlations in financial markets turned positive. At the very least, it implied that an up market on average triggered upward movements in other markets. In the early years, the U.S. was the leader but over time other markets were also sufficiently integrated enough to trigger reactions in other markets.  The 2007-09 Great Recession also proved that shocks were not limited to the financial markets but impact on real sectors could also reverberate across the globe.

Although the decline in the Chinese stocks markets in July 2015 impacted global markets, several have since rebounded. This partly reflects contagion, defined as the tendency of markets to react globally to local shocks, a phenomenon inconsistent with market efficiency because it indicates investors are unable to distinguish between strong and weak markets during periods of shocks.

The recent news that forecasters have revised the estimates of GDP growth differently for countries reveal one silver lining. Markets appear to be less integrated and growth rates are varying in different regions. One reason is that the internal markets of many countries are growing larger and hence are less susceptible to global forces.

Two prominent examples are India and China. Both economies are not only integrated into the global economy but they have been moving in the same direction for the past 15 years. As the table below shows, growth rates of GDP were strong up to 2007, slowed in 2008 and 2009, and then except for a brief surge in 2010, began to decline.


























































Source: World Bank

Similarly, inflation continue to increase till 2008, paused in 2009, increased in 2010  before beginning a descent, with China decelerating at a faster rate. This forecast for future performance however is different, with growth outlook for India positive and China negative, suggesting that demographics and domestic institutional factors are playing a major role.


  1. The demographics does not look promising because of an aging population. Older Chinese will exceed 25% in 2030.

  2. Loans of major state and rural banks are non-performing and may require the government to bail out trillions in loans

  3. As urban migration is encouraged, wage levels are increasing in several sectors

  4. Political freedom is yet to be unleashed

  5. Very few authoritarian regimes have transitioned smoothly to free markets



  1. Young population (1/2 of the 1.25 billion population is currently below 25 years)

  2. Free market system

  3. Low inflation assisted by the low oil prices

  4. Strong technology and industrial sectors

  5. Corruption however persists at all levels of the bureaucracy

It is not clear whether an authoritarian China or a free-market India will eventually succeed in mapping a steady growth path for the coming future. What is clear is that there are sufficient regional differences to ensure that markets will continue grow at different rates and this should be considered good news for global diversification. Currently, the slow growth projections for Europe and parts of Asia are being made up by positive growths in parts of Africa, South America and the Caribbean. Although there is still a danger that the fall of a major economy could cause all markets to decline, it would be worse if the markets were fully integrated.

If the trend continues, expect

  1. Interest rates to vary between countries

  2. Stock markets to diverge between countries

  3. Exchange rates to diverge between countries

From an investment perspective, there should be sufficient opportunities for real diversification in international portfolios. And there will still be a need for experts to focus at the regional and country levels to fine-tune international portfolios, even as there has been a movement to passive index funds.