It is rare for the US to look at Europe with envy. The past months have witnessed those rare moments. Concerns about America's tumbling recovery have been rising just as anxiety about the euro-zone economies faded. The dollar is weakening among richer economies and gold is touching the US$1,300 mark. Some economists believe America's disappointing GDP growth figures in the second quarter - up 2.4 per cent at an annualised rate - could be the start of a slide towards a second recession, with one out of 10 people still unemployed.
Even though corporate America is flush with cash, companies are still shy of hiring, preferring instead to squeeze yet more output from fewer people. Paradoxically, Europe's hopes were renewed as the euro-zone growth figures came in higher than those of the US in the second quarter, thanks to strong growth in central Europe and supercharged Germany. Increased sales to fast-growing emerging markets - namely Brazil, Russia, India and China (BRICs) - have handed German industry its strongest quarter in decades. Germany's unemployment rate of 7.6 per cent is a bit lower than at the start of the financial crisis in September 2008.
Yet it is only a few months ago that fortunes looked reversed. Then, the US seemed to be pulling back strongly while Europe was limping. The dollar was riding high along with gold as investors fled the euro zone. But both the US and Europe seem to be suffering from delusions of weakness and strength. In Europe, it is far too early to celebrate the recovery - Spanish unemployment levels and Irish credit default swap rates are clear indications why.
In the US, the recovery has lost momentum with property still a drag on the economy. The need to deleverage both economies is the other major impediment to growth. The US and Europe remind us of Mark Twain's quote on statistics: "If you have one leg on burning firewood and another on ice bar, statistics will tell you that on average you are comfortable." The US and Europe are equivalent to firewood and ice bar, investors are better off jumping from both.
On the other hand, less leveraging and more potential are boosting growth in emerging markets, which could continue to decouple - particularly the BRICs - depending on the degree of weakness in the developed economies. Concerns of a double-dip still exist driven by weakness in Japan, the US and the peripheral countries of the euro zone. Two factors are expected to add to the weakness in the developed countries: on one hand governments are running out of policies and incentives; on the other, serious fiscal retrenchments could kick in next year, with some financial problems too big to bail out.
In a double-dip scenario, the decoupling theory will fall apart and emerging markets are likely to underperform as the aversion to risk will shoot through the roof. Economic growth and demand for manufactured goods and services from China and India, and for natural resources from the rest of the BRICs, will be strongly affected, and investors will tend to exit risky assets first - frontier and emerging markets.
Otherwise, and in any other scenario - mild slowdown, U shape or L shape - emerging, frontier and MENA markets have a very strong potential to decouple. There is a high probability of an outperformance in the MENA region due to the fact that it has significantly lagged other emerging markets. Positive current accounts, net exporting economies, large surplus capital, market-oriented reforms and good infrastructures will provide strong catalysts for growth. Making good use of excess cash from oil outputs can also come in handy.
The problem of the absence of independent monetary policies in the GCC countries, and the peg to the dollar, could constitute a burden on the MENA economies in case of a confirmed decoupling. Governments and central banks of the region are stripped of any monetary and fiscal tools, which could lead to asset bubbles again if global interest rates remain as low.
Walid Hayeck is the head of asset management at The National Investor
