The news from the US keeps getting worse, it seems. Trouble at Home Depot and Wal-Mart rattled the US markets on Tuesday, from which European markets took their cue on Wednesday morning. The FTSE 100 was down about 1 per cent, or about 60 points, in morning trade.
The (admittedly generally rather gloomy) Nouriel Roubini argued at RGE Monitor that July US retail sales, reported on Tuesday, though better than expected reinforced his view that the saving-less and debt-burdened US consumer is under strain and that consumption is set to slow.
“Many components of consumer spending — especially durables spending — are already weak: new home sales sharply down, auto sales have been falling for over six months, spending on housing related durables is weakening,” he wrote. For those hoping that the modest rebound evident in July may be lasting, he warns that early data for August are already showing signs of softness. The risks of a US hard landing are meaningfully rising, Roubini concludes.
Where the US goes, the rest of the world follows. Or does it?
Earlier this week, analysts from Goldman Sachs pointed out that in comparing the current squeeze with the LTCM episode in 1998, the players’ roles have been reversed. In 1998, difficulties emanating from the emerging markets took their toll in the developed world. Now the epicentre of the troubles is squarely in US terrain.
Morgan Stanley’s global emerging markets strategist Jonathan Garner has also been arguing that the emerging markets are now in a more robust position than they have been in the past.
As risk is reassessed globally, the emerging markets are the watchdog that has failed to bark. The MSCI EM index is still up 14 per cent for the year to date, he says, while sovereign bond spreads have widened by a tiny amount compared with similar episodes in the past.
Dramatically stronger fundamentals are behind this, says Garner, adding that the bank sees a transition to an emerging market-led world economy from one led by the US:
Most EM countries are now external creditors, and the corporate and household sectors are much less leveraged than their developed market counterparts.
The emerging world is expected to contribute about half of global GDP growth in 2007, around three times the current forecast for the US at just 15 per cent.
Morgan Stanley’s case for the likelihood of weak linkages between the housing and financial trouble in the US and the emerging world rests on three factors: the increased role for domestic demand in EM growth; more diversified trading patterns; and reduced reliance on capital flows to plug external deficits.
The bank’s China analyst, for example, points out that the country’s GDP growth bears little correlation with US GDP or consumption growth. China’s stock market, we noted yesterday, also seems to forging its own path.
While Chinese export growth is linked to US consumption, the country now has a great ability to expand exports in other markets when the US slows, said Qing Wang, with Chinese export growth to the eurozone now outpacing that to the US.
Now that valuation convergence has been achieved (as shown in this Dresdner Kleinwort chart), focus turns to the emerging markets earnings cycle, argues Garner. But ever-more open markets mean that that growth can be got at through developed world companies.
The bank’s data, run by US strategist William Smith, shows that internationally orientated companies in the US have been generating higher earnings growth, both absolutely and relative to expectations, in the latest round of results.