In economics, "decoupling" is a confusingly imprecise term. Originally used in physics, it described interactions disappearing between objects.
Economists often apply the word to countries becoming less dependent on wealthy consumer markets such as Europe and the U.S. The idea: Economies like China and Brazil, exporters that may once have had all their eggs in the occidental basket, have now diversified.
But the change is actually a recoupling -- a shift toward being less dependent on U.S. and European consumers, but more firmly tied to growing markets across Asia and the Middle East.
Many argue that the shift could provide some cushion in the event of slowing U.S. and European economies. That theory is about to be put to the test.
As the U.S. grinds toward recession, the complex global links between currencies, commodities and industries are being restructured.
The global trend toward decoupling -- along with the arrival of the Chinese and Indian economies as movers and shakers on the global demand scene, and the immense changes in the natural gas and oil industries -- means past models provide only iffy guidance.
Forecasts for changes in demand, growth and prices across the spectrum of global goods are at least a shade less dependable than they were a decade ago.
Some links in domestic economies and in the global supply chain will benefit; others will suffer from a U.S. slowdown and probable declines in commodity prices.
1.Business
Banking stocks provide a broad-based approach to investing in a country's economy.
In fast-rising economies such as India, banks like HDFC HDB and ICICI Bank IBN provide commercial loans to businesses of all sizes and across most spectrums of the economy.
They attract retail banking customers and put the individual deposits to use to back mortgages, credit cards, and personal and business loans.
Broad-based hits to an economy inevitably hurt banks. But banks are often well-positioned to weather economic shifts in which certain pieces of an economy rise while others fall.
Name Of The Game: No secret here: amass capital at the lowest possible cost, either through deposits, debt or investments, and lend it out at profitable rates.
Accurately gauging lending risks and luring customers are what ultimately edge out the competition.
2. Market
The foreign banks group includes financial institutions from 13 different economies, including Canada, India, Australia and South Korea. The group as a whole has slipped from 27th to 66th among IBD's 197 industry groups.
Brazil's whirring economy is hands down the largest piece of the action, with its three U.S.-listed banks claiming 32% of the group's total market capital.
The U.K. is next in line, with the massive Royal Bank of Scotland RBS holding a 16% piece of the pie. The three U.S.-listed South Korean banks hold a 12% share.
The American depositary shares of 21 of the 26 stocks in the group are listed on the NYSE. The Argentine Grupo Financiero Galicia GGAL is listed on the Nasdaq. The four Canada-based banks are listed on the Toronto exchange.
The customer base of most banks in the group are consumer populations in developing economies. Credit markets in many cases are developing alongside a rise in middle-class wage earners.
Some in the group are global regional banks, with branches established in multiple countries. Among those is the Royal Bank of Scotland, which is nearly twice the size of Australia-based Westpac Banking WBK, its closest peer in the group.
3. Climate
Banking climates differ by region. In South Korea, banks are battling each other as well as a maturing credit market and heel-nipping inflation.
The Capital Market Integration Act, set to take effect early next year, has freed banks to buy securities firms or set up brokerage units to strengthen their investment banking businesses.
Kookmin Bank KB signed a deal to acquire a small securities firm, Hannuri Investment & Securities, for 266.3 billion won ($281 million) from U.S.-based JDK Investment and other stakeholders last year.
Chief Executive Kang Chung-won told the Korean Herald that the nation's largest lender could boost its investment banking share by purchasing another, even larger, brokerage.
Shinhan Financial SHG, which has 250 staff members in investment banking, plans to triple that number by 2010 and raise investment banking income to 50% of total profit. Woori Finance WF will increase its investment banking staff to 500 by 2010.
The banks, facing declining interest margins and falling demand for home-backed loans, are also crowding into subprime lending markets -- challenging the country's consumer lending industry.
The banks are crafting more aggressive overseas campaigns this year to maintain their growth.
The stocks themselves may see some revaluation as the government reduces barriers restricting conglomerates and pension funds from investing in banks.
But analysts largely see the price moves as limited by the negative outlook for the group's earnings growth.
4.Technology
One symptom of the data-network-driven banking of the 21st century: the rise of global consolidation.
The monster $99 billion merger of Royal Bank of Scotland with Holland's ABN Amro ABN in October was the world's largest financial services takeover as well as Europe's first sizable, hostile cross-border banking deal.
Ultimately, ABN's $59-billion-a-year banking business will be divvied-up between the RBS consortium's partners.
ABN Amro's Dutch operations will likely get the Belgium-based Fortis. Spain's Banco Santander will claim ABN's Brazilian and Italian operations. (See related story on this page.)
RBS, meanwhile, will gather operations in Europe, Asia and the Americas as well as ABN's investment banking arm.
In all, the mass wedding will join more than 100,000 employees at ABN with the 233,000 at RBS, 56,000 at Fortis and 126,000 at Banco Santander. The dowry for RBS and Fortis is the pool of savings socked away for decades by Europe's aging population.
As ABN's new owners dip into that pool and distribute its potential through their investment banking, lending and client services networks, it could mark a turning point 14 the long-cultivated financial integration of Europe.
5.Outlook
The economic views from Korea, Brazil, India and elsewhere are all unique, but they share some concerns and prospects.
High energy and commodities prices are driving cost inflation across most economies, and a slowing U.S. economy is pulling the plug on one of the biggest spenders on the global market.
Central banks are tinkering with interest rates and liquidity. Most stock indexes worldwide have registered declines since late last year.
The bulk of forecasts show GDP growth slowing this year in most major economies, then evening out or increasing through 2009.
Those factors point 15 a challenging global banking environment.
Many markets, like Brazil, have only limited exposure to the subprime-mortgage-based meltdown that is wreaking havoc across global financial markets.
But the possibility of a speculative price bubble in oil and other commodities represents a "channel of contagion," said Celina Vansetti-Hutchins, team leader for South American bank ratings at Moody's.
"That is where Brazil will really see disarray, if the commodities prices fall," she said.
Upside: The potential for a shallow U.S. recession and a soft landing in the global commodities boom.
Risks: A rapid deleveraging of commodities or a decision by China to allow the yuan to appreciate further against the dollar could put global markets -- and banking operations worldwide -- in uncharted territory.
Source: Investor's Business Daily
