Earnings growth estimates for emerging markets remain too optimistic given decelerating global growth, and cost pressures, says Oussama Himani, strategist at UBS (NYSE:UBS).
He notes that while slower growth - and possible recession - has long been expected in the US, a sharp deceleration in Europe has only much more recently become an obvious development.
"Emerging markets, on the whole, are more exposed to Europe than they are to the US," Mr Himani says. "The EU is the destination of a larger share of emerging market exports."
He also warns that underlying earnings growth expectations in emerging markets are based on margin expansion - which does not occur in slower growth environments.
"This is especially the case in the current cost environment. Wage pressures are evident in most emerging markets, while neither energy prices nor commodity prices are likely to moderate in any meaningful way.
"We believe that significant earnings downgrades are likely in the months ahead.
"As a baseline scenario for 2008, we now assume sales growth will be 10-12 per cent, but that net income margins will decline by one percentage point to 11 per cent. This will imply earnings growth of about 9 per cent this year. However it will take only small further changes in margins to imply no earnings growth."
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