Over the past couple of weeks, global markets have begun acting in a noticeably different manner. Across asset classes and geographies, the relative performance of markets has differed considerably from the trend of the past few years.

Notably, stocks in the US with large market capitalisation and the Nasdaq have been among the best performers over the past few weeks. For the first time since this rally began in 2002-03, these markets are being driven by multiple expansion, despite all signs of a slowdown in earnings.

Their long cycle of price-earning contraction, driven by rising yields, seems to be coming to an end.

Emerging market equities are no longer the high beta way to play a rising market. For the first time since the bust of 2000, emerging market equities have begun lagging behind the US and European indices at a time of rising global stock prices.

Prior to this episode, emerging market stocks would always be at the forefront of any global rally. Since 2000, emerging market stocks have always outperformed and led from the front whenever global markets began to look up.

The multi-year bull market in commodities also seems to have been (at least temporarily) interrupted. The weakness in commodities has hit the related equity sectors, and hence market leadership has shifted away from these sectors.

Markets have begun to question whether the so-called structural bull markets in commodities have come to a premature end. Weaknesses that began to show themselves in the oil markets have now spread throughout the commodity complex. Weaknesses in commodities have also served to put pressure on emerging market equities.

In the US, share prices and bond yields have once again become negatively correlated, as they were until 1998.

The US dollar has been firm despite the Fed having called an end to its tightening campaign, confounding the permanent dollar bears once again. Combined with the move in the dollar, bond yields have fallen globally over the past couple of months, indicating less apprehension on inflation.

So across different asset classes, markets are behaving differently from the pattern of the past few years, trying to tell us that something may have changed.

All of the above trend changes are signs that the market is pricing in a slowing of global growth, and making the relevant shifts in relative asset performance. Till such time as the global growth slowdown is not fully complete, or completely bought into by market participants, these shifts in relative performance are likely to persist.

Inflection points in the global business cycle tend to mark shifts in relative performance between asset classes. To the extent that global growth has now peaked, we may be in for a period of very different market behaviour from what we had got used to over the past 2-3 years, when global growth was accelerating.

Investors may have to get used to a very different pattern of market behaviour, as leading sectors and geographies may turn into laggards in the new order.

All signs point to a slowing of global growth - be it US housing, leading indicators on both sides of the Atlantic, or the marked deceleration (albeit from a very high base) in Chinese fixed-asset investment.

In such an environment, emerging markets as an asset class normally have difficulty. Ultimately, the asset class is still a bet on global growth and tends to be highly cyclical. It normally delivers super-charged returns whenever global growth is accelerating and yields are actually rising.

The asset class has a much tougher time whenever growth is slowing and we are entering the phase of the economic cycle when the next move in yields will be lower. Thus, we may be in for a more difficult time for the emerging market asset class than is the current consensus.

The bulls believe that given the strong fundamentals and reasonable valuations, emerging markets will be able to de-link from this global slowdown and outperform. This may happen eventually but there is every chance of some hiccups on the way.

Given that this slowdown has just begun and both the engines of global growth, the US consumer and Chinese fixed-asset investment, are under the gun, it is very likely that we will get a global growth scare somewhere down the line before this slowdown is over.

Everyone still believes that we will have a soft landing in the US and hence in global growth. However, I find it amusing that as the much-abused US consumer finally begins to capitulate, the worst the market is pricing in is a soft landing.

Could it not be possible that if the US consumer is truly as leveraged as everyone thinks and as dependent on rising housing prices and refinance cash-outs as we were led to believe, things could get ugly for a quarter or two. What if housing prices actually decline, what if Japan and the euro area are unable to pick up the slack of a slowing US consumer.

God help us if we were actually to fall into a recession in the US. I do not think markets are yet pricing in such a scenario. Yet such an outcome does not seem too far-fetched. It may not be the base case, but is at least worth considering.

If things were to get more difficult for the EM asset class, how will India fare Undoubtedly, to the extent that money flows out of the asset class, India will also suffer, but we seem to have a huge wall of money still waiting to enter our markets, whether it is on the private equity side or venture capital and realty.

The world's love affair with India seems to continue unabated. The world has discovered the quality of Indian companies, entrepreneurship and market potential and now seems unwilling to let go. Eight per cent-plus growth for three years has got everyone extrapolating this for the coming decade.

Given the spate of investment proposals announced, and the entry of global MNCs determined to make India a production base (e.g. slew of announcements on turning India into a global production hub for small cars), it is difficult to see what can short-circuit this process. As long as inflation and interest rates behave, there seems to be no other obvious speed breaker.

The only risk, which, remains, is that of the government and its penchant for springing another reservation-like surprise on an unsuspecting country.

India is an expensive market, with investors willing to pay for growth visibility. This is unlikely to change if we can continue to deliver growth in a slowing world. The ironic thing for all the sceptics will be if PE multiples expand even further in India as the country demonstrates strong economic and earnings growth, even in a slowing global
environment.

Can we de-link from a slowing global economy? That is the critical question, which will determine market performance over the coming months.