During 2009-10, it was widely thought that the deflating credit bubble was solely a US problem, and that economies in the remainder of the world were still healthy. Consensus at the time was that the US was de-basing the dollar, and the euro would soon be an alternative reserve currency. In 2011, investors fully realised that there were credit problems in Europe too, and talk of the euro becoming a reserve currency ended.

Despite 2011's dismal emerging markets equity performance, investors continue to believe that the emerging markets are largely immune to the developed world's credit hangover. But cycles often begin in the US, travel to Europe and then end up in the emerging markets. This cycle will likely follow that historical precedent. The emerging markets' difficult tugs-of-war between inflation and growth indicate that the emerging markets, rather than decoupling from the developed world, were perhaps the biggest beneficiaries of the global credit bubble.

Eoin Treacy's view There are a number of controversial points raised in this article. To begin with, we do not consider US equities as a risk-off asset. I agree they benefit from the relative strength of the US economy, particularly compared to Europe at present, but their performance relative to the Treasury market does not support the contention that they represent a risk-off trade. Smaller cap markets experience greater peak to trough swings but are still subject to the Wall Street Leash Effect we have referred to so often.

The socialisation of private sector debt is a major theme. Governments have taken on huge private sector debts in an attempt to avoid a depression. Because of this transfer, total deleveraging has been relatively modest. Banking sectors have been recapitalised at the expense of the sovereign in a host of countries. Sovereign yields are at record lows not least because governments have been buying their own paper and investors have played along. Supply has exploded and debt / GDP ratios are at a point where investors are expressing alarm. While bond prices can stay higher for longer than many anticipate, the seeds are being sown for a denouement which is unlikely to be pleasant for those holding low yielding assets.

A more sanguine attitude to this issue is to assume that central banks will continue to increase the size of their respective balance sheets until the velocity of money returns to a solid upward trajectory. At that point, it would be natural for the price of Treasuries to decline and yields to rise as government support for the asset class diminishes. The realistic possibility of US energy independence makes a growth led recovery more of a probability at some point in the next decade. In such an eventuality higher interest rates would be a virtual certainty.

There is no doubt that stock markets benefit from global liquidity provision. In a global market capital will always flow towards the highest yielding or most productive assets. However, a distinction must be drawn between highly indebted Western economies and those in Asia. Governments, corporates and individuals in Asia do not have anything close to the degree of leverage evident across Europe and North America. They are not immune from tightening of liquidity, but they represent global GDP growth leadership, improving standards of governance, favourable demographics and the region is host to some of the world's temporal as well as relative strength leaders. Liquidity may be one of the reasons for the region's outperformance but it is certainly not the only one.

One of the reasons the S&P 500 and particularly the Nasdaq have been such relative outperformers over the last few years is because they are dominated by globally oriented companies. Two of the three best performing themes have been Technology and the Autonomies. (Also see Comment of the Day on December 9th 2011). In common with companies that benefit from the hollowing out of the middle class, they have dominated the best performing S&P500 stocks over the last four years.

Credit recessions take a great deal of time to work through. They represent a trying period for consumers and investors alike. According to Kenneth Rogoff and Carmen Reinhart it takes, on average, seven years to recover from a credit induced recession. Therefore the USA is approximately half way through this one. Europe's unwind will probably take a while longer. Is it not reasonable to expect that debt deleveraging is likely to present the greatest challenge to the most indebted countries? To date, the sectors that have done best are mostly focused outside them.