More Than One Engine

Meanwhile, in the developed universe, investors seem to be consumed by "EU-phoria." As a recent Merrill Lynch survey shows, investors are extraordinarily bullish about European stocks, with a record number of respondents sharing the view that the euro zone has the most favorable corporate outlook of all major developed-market regions. European stocks are up a strong 10 percent this year, after having tripled in value in dollar terms since the 2003 trough.

It is a sign of the changed times, and also a testament to the dynamism of the U.S. corporate sector, that the U.S. stock market has also reached new highs even as the underlying economy downshifts to a much slower pace. American firms have adapted to the changing economic balance by becoming much more global in nature, with their overseas operations now accounting for nearly 40 percent of sales, up from less than 30 percent in the late 1990s. Empirical Research Partners estimates that half the U.S. equity returns this decade have come from "China plays" such as energy, materials, machinery and construction-spending companies. That is despite the fact that these sectors on average represent only 8 percent of the U.S. market.

A world of multiple growth engines, then, doesn't mean financial markets are less synchronized. The interlinkages in a globalized world are far too strong for any meaningful decoupling to occur. What the new world order implies is simply this—to get a fix on global growth and financial-market behavior, it is as important to track Chinese and European economic data as the whims of the U.S. housing market.

Sharma is head of emerging markets at Morgan Stanley Investment Management.

© 2007