The report is quite +ve on the financial markets' robustness against the slowdown in GDP growth in EU and U.S., and the support provided to the EM econ growth.

High, neutral, low beta EMs. China stands out as among the least insolated to the slowdown in developed economies.

Happy to discuss.

The Odd Decouple

"      Economic growth in the US, Canada, and Western Europe is downshifting sharply in the face of significant headwinds, including the continued slump in the US housing market, a sharp tightening in credit markets, and yet another jump in energy prices. In response, JPMorgan has lowered its forecast of the level of GDP in this region by 0.75% in 4Q07 and 1Q08. The ability of the rest of the world to absorb this slowdown will help determine whether the global expansion muddles through or experiences a more serious downturn.

"      History shows that the transmission from developed to emerging market growth operates through two channels. The first is through trade and manufacturing linkages. The second is through financial markets, whereby a reduction in global risk appetite curtails capital inflows, depreciates currencies and produces a significant tightening in EM financial conditions.

"      If these two channels operate normally, our analysis suggests that a moderation in developed market growth is ultimately matched by a comparable slowing in the EM. This relationship varies widely by region and country, with EM Asia tending to be "low beta," EM Europe being "neutral beta," and Latin America being "high beta." Across countries, China and Russia respond the least, while Taiwan, Turkey, and Mexico respond the most.

"      Although EM exports and manufacturing activity are starting to feel the shock, EM financial markets are not following the normal script. Capital inflows to the EM have been remarkably strong on net since the outset of the credit turmoil this past summer, focused in the equity market. Commodity prices and EM currencies have also remained firm. The absence of a negative financial market spillover to date in EM economies likely reflects, in part, the improved fundamental position of this group.

"      If EM continue to see little or no financial fallout from the

developed market slowdown, our analysis suggests this could offset more than half of the drag on growth by the end of 2008. Under this scenario, trade linkages would still produce a material slowing in EM industrial activity growth. But EM domestic demand and GDP would be expected to continue to expand solidly.

"      If realized, this dynamic would reflect a reversal of roles from the 1997-98 period. At that time the United States experienced a manufacturing sector contraction, but maintained strong demand growth, which helped temper the severity of the recession in Asia.