DEFINITION of 'Decoupling'

The occurrence of returns on asset classes diverging from their expected or normal pattern of correlation. Decoupling takes place when two different asset classes that typically rise and fall together move in opposing directions, such as one increasing and the other decreasing. For example, stock and corporate bond returns generally move together. If the stock returns were to increase while the returns on bonds decreased, decoupling would have occurred. Another example can be seen with oil and natural gas prices; these typically rise and fall together. Decoupling occurs when oil moves in one direction and natural gas moves in the opposite direction.

BREAKING DOWN 'Decoupling'

Decoupling refers to a decrease in correlation. The concept that the world's emerging markets no longer need to depend on U.S. demand to drive economic growth, is an example of economic decoupling. Whereas, emerging markets at one point relied on the U.S. economy, many analysts now argue that some emerging markets, such as China, India and Brazil, have become sizable markets on their own, for goods and services. The argument for decoupling indicates that these economies would be able to withstand a faltering U.S. economy.

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