EM Corporate Health: Profitability

Our EM strategists’ analysis of nine non-financial sectors across 18 EM countries has not revealed widespread signs of improved corporate profitability or profit margins:


Net profit margins for EM non-financial companies have dropped to well below their 2008 lows. Notably, the decline is broad-based: seven out of nine sectors have seen their net profit margins shrink. Only technology and consumer services have seen their margins improve.

The return on equity (ROE) for non-financial EM companies has also plummeted below its 2008 lows. Excluding technology and consumer services, ROE has dropped in all other sectors.

Furthermore, the measure of operating profitability – calculated as EBITDA-to-assets – has also been drifting lower. Like other measures of profitability, the drop in this measure is broad-based across sectors. This shows that while EM companies have increased assets, those investments/new assets have not produced additional profits. On the contrary, profits have massively disappointed. As a result, return on invested capital has dropped sharply.

Lastly, another measure of corporate efficiency is assets turnover, calculated as the ratio of sales to assets. This too has plummeted in all sectors except health care.

Amid plunging return on capital and return on equity, leverage has skyrocketed in the majority of EM countries and sectors as highlighted in the next Insight, (Part II) EM Corporate Health: Leverage.

U.S. Growth: Worries About 2016

Our Global Investment Strategy service is concerned about how the U.S. growth picture will unfold next year.


The Great Recession created a lot of pent-up demand, which has slowly been exhausted over the past few years. Auto sales are now close to their pre-crisis peak, while business capex has returned to the level consistent with the economy’s long-term growth prospects. The renormalization in demand in just these two areas contributed 0.9 percentage points to growth over the past five and a half years, but is likely to contribute only 0.3 points over the next two.

On the positive side, residential construction should continue to increase. However, given that homebuilding activity has already been slowly recovering over the past few years, the incremental impact on growth should be minimal. A bit less fiscal drag will also help, but again, we have seen a fair bit of renormalization on that front already – government spending on goods and services contributed 0.23 percentage points to growth in the first half of this year, and an average of 0.15 points over the past five quarters. This is a huge improvement over the Q4 2009-to-Q4 2013 period, where government spending subtracted an average of 0.4 points from GDP growth.

Credit growth has been increasing over the past few years from a low of around -4% in 2009 to around 5% at present, representing a massive 9-percentage point swing. As credit growth stabilizes at a rate close to that of nominal GDP growth, the so-called credit impulse will fall back to zero. That could shave around 0.5-1 percentage points from growth. The implication is that even if the Fed does raise rates in December, it will not be able to raise them very much thereafter. On top of all that, policy uncertainty is rising, please see the next Insight, A Bout Of U.S. Policy Uncertainty?