Housing will continue to be a major drag on US economic growth in the coming year, but even in the worst-case scenario, stock market gains in emerging markets will outperform others worldwide, says Allan Conway, London-based head of global emerging markets at Schroder Investment Management.

SchrodersÆ base-case scenario reflects a slowdown in global economic growth to 2.9% next year, and an expansion of 2.1% for the US and 6.7% for global emerging markets. This assumes the US Federal Reserve will cut its key federal funds target rate by a further 25 basis points next week and 50 basis points early next year. Schroders believe there is a 60% probability this scenario will take place.

ôIf this scenario happens,ö emerging markets will give you a 15-20% return,ö says Conway, referring to expected gains from the MSCI Barra Emerging Markets Index by the end of 2008.

However, ConwayÆs personal view is the base case scenario underestimates the risks of a weaker-than-expected US economic growth.

ôThe likelihood of the base case scenario at 60% probability is too high. My alternate view is the base case scenario is nearer 40% probability,ö he says, adding the risk of a credit crisis in the US is much higher than most economists expect. ôMy colleagues in the debt side are even more bearish.ö

Still, even with a slightly more bearish expectation, Conway says one thing wonÆt change û the potential of emerging markets to outperform.

Under a scnerario of stagflation, where the US economy grows by only 1.6% next year, the MSCI Barra Emerging Markets Index will likely post gains of 10-15% by end-2008, he says.

Under a scenario of a credit crunch, where the US economy will grow by an even more modest 0.7%, the MSCI Barra Emerging Markets Index could fall 10% but that would likely be relatively less painful than losses in other markets worldwide, he adds.

Conway joins the debate of whether emerging markets are decoupling from the US and the rest of the world, and he takes the side that says yes.

ôThe world is now driven by emerging markets. Decoupling is a fact, not a myth. If a slowdown in the US happens, of course emerging markets will still be affected but nowhere near the way they would have been affected in the past,ö he says. ôIf the US has problems or suffers a recession, emerging markets will be the safe haven.ö

Backing up his argument, he says, are the emerging marketsÆ record high foreign reserves, massive reduction in foreign debt, huge imports, manageable inflation, and undervalued currencies.

Within global emerging markets, Conway favours South Korea, Thailand, Brazil, Russia, Egypt, Turkey, and the United Arab Emirates, markets where Schroders is overweight.

Schroders is neutral on China and underweight in markets such as India and Mexico.