With Canadian equity markets getting thumped today, National Bank Financial suggests that the fortunes of the emerging markets will likely be key to determining the future of the resource-laden Toronto Stock Exchange.

NBF notes that many investors are clinging to the theory that emerging markets can help the world economy weather a U.S. recession. “But for them, the ride ahead is about to get bumpy,” it argues.

“The theory which suggests that the world economy is relatively immune to a U.S. economic downturn because of strong growth in emerging markets has been key in helping maintain a strong interest in commodity-related markets. An increasing number of economic reports, however, suggest that European and Asian countries are not insensitive to America’s gravitational pull,” NBF maintains.

“This development has important ramification for resource-laden equity markets,” NBF points out, noting that the MSCI emerging market stock index dropped precipitously today. It now boasts a year-to-date loss of 15.7% (vs. 12.1% for the S&P/TSX).

“For Canadian investors, it is significant that emerging markets are now starting to underperform. Though Canada is a member of the G-7 and probably has the best fundamentals of the group, its equity market has recently correlated more closely with emerging-market indexes than with U.S. and overseas benchmarks,” NBF reports. “If the decoupling theory proves to be a mirage, the commodity rally could flounder and bring down Canadian equities in retreat.”

http://www.nbf.ca