Most people accept by now that growing aggregate debt in the global economy has cast a long, dark shadow on the strength and sustainability of global output. Arguably emerging markets, having de-rated in pretty much every asset class against the developed assets, are already priced for this weak ‘beta’ from global growth. However, have most investors considered the possibility that there may be negative ‘alpha’ for EM in the current mild recovery?

We find that in the developed world even where growth is improving, imports aren’t coming through at quite the pace they did in previous cycles. Having risen in a big way over the last 20 years, import propensities in EM’s big markets – the US, Europe and China – seem to have flattened out, or are falling. The ratio of growth in global trade to growth in global output used to run at 2 to 2.5 in the two decades before the financial crisis. It is now just under 1.

At least a part of the explanation lies in the fact that the sectors that are rebounding in EM export destinations are ones which don’t make big demands on EM exports. In the US these are sectors such as heavy machinery, transportation equipment and construction equipment. Perhaps not co-incidentally, these are the inputs drawn into the shale gas and oil energy industry. The point though is that the US does not import these inputs from emerging markets; it either builds them itself, or imports them from other developed countries. China’s import propensity is already falling and this process is likely to extend further as the economy rebalances away from investment towards consumption.