Robust growth in developed economies will not be enough to lift EM growth.
The importance of U.S. and European economies to EM has declined tremendously since the late 1990s, while the importance of China and intra-EM trade has grown. But even in the late 1990s, booming U.S. and European growth was not enough to prevent crises in EMs. While U.S. import volumes will likely recover in 2017, this will not be enough to prevent an EM growth slump.
Instead of external demand, the domestic credit cycle is one of the main drivers of EM growth. Assuming credit growth in each individual EM country converges with its nominal GDP growth in the next 12 months, and in China’s case over the next 24 months, the 2017 projected EM credit impulse (equity market cap-weighted) will be negative. Historically, the credit impulse has been a good indicator for EPS growth.
Bottom Line: EM growth will disappoint and EM listed companies’ EPS will shrink in 2017.