Global economic growth typically decelerates at this point in the production cycle, but there is no evidence of a slowdown to date, says Jonathan Wilmot, chief global strategist at Credit Suisse First Boston.
Meanwhile, CSFBs index of global risk appetite has entered the euphoria zone for the first time in the current cycle. Lots of growth now would be bad for risky assets, Wilmot says, because it means that the coming downturn will be sharper. A rising world interest rate environment will cut off the flow of excess liquidity to emerging markets, he says.
Emerging markets perform worse than developed markets once the euphoria zone is entered, according to Wilmot, and they generally are flat to lower within three to six months later. Within six to 12 months the index of risk appetite could be back in the panic zone, he says.
Not only are emerging markets more susceptible to global monetary tightening than are developed markets, but they are also more cyclical, Wilmot says. Emerging markets are also more at risk in this cycle because they are more directly exposed to a big slowdown in China, he says.