20181206-高盛-Short-Lived_Rally_-_tradable_but_not_yet_sustainable_23页_1mb

EM Strategy Views Summary

Core Content

The document provides an analysis of the performance and outlook for Emerging Markets (EM) assets in 2018, highlighting a short-lived rally that is not yet sustainable. The report outlines the factors influencing EM asset returns, including growth dynamics, Federal Reserve (Fed) policy, and trade tensions with China. It also presents investment recommendations based on relative value opportunities and macroeconomic forecasts.

Main Points

• Weak EM Returns in 2018: 2018 is expected to be the second year post-Great Financial Crisis (GFC) where all major EM asset classes post negative returns. However, a recent rally has occurred, attributed to perceived Fed dovishness and potential trade tension abatement.

• Macro Factors Driving EM Returns:

  • Growth Deterioration: Growth data has been a significant factor in the underperformance of EM assets.
  • Fed Policy: US 2-year rates have had an impact on EM fixed income.
  • Trade Tensions: China trade tensions have notably affected EM equities and local bonds.

• Short-Lived Rally: EM assets have shown a rally, but it is expected to be short-lived (1-3 months) unless there is a genuine improvement in growth data. Historical data suggests that rallies lasting more than 2 months are rare without growth improvement.

• Relative Value Opportunities: The report recommends focusing on relative value strategies, particularly MSCI EM versus MSCI EAFE (non-US DM equities). The target for MSCI EM is raised to 110 from 106, and the stop is increased to 101 from 97.

• EM FX Performance: EM FX has outperformed its beta-implied level relative to G-10 peers, suggesting a relative value opportunity in FX.

• Growth Breadth: The breadth of EM growth has been low, with only a few economies showing signs of improvement. This suggests that the rally is not broad-based and may not be sustainable.

• Macroeconomic Forecasts:

  • EM growth is expected to improve due to early cycle dynamics, fading negative impulses, and looser policies in China.
  • Inflation and policy rates vary across EM countries, with some showing signs of easing and others facing tightening.

• Investor Behavior: EM portfolio investment and foreign flows have shown mixed trends, with some countries attracting inflows while others experience outflows.

• FX Forecasts:

  • EM FX is expected to perform differently over the next 12 months, with some currencies showing potential for appreciation.
  • The report includes fair value and carry forecasts for various EM currencies.

Key Information

• Factor Model: EM asset returns are modeled using growth (CAI), US 2-year rates, and the CNY. Growth has been the most significant factor in EM underperformance.

• Historical Rallies: EM rallies lasting more than 2 months without growth improvement are rare. The longest was in 2010, driven by US rate cuts.

• Relative Value Strategy: The preferred investment approach is relative value, with a focus on EM equities and local bonds versus G-10 peers.

• Macro Catalysts: The rally is driven by macro catalysts such as a dovish Fed and trade tensions easing, but these are not expected to be long-lasting.

• Growth Outlook: The report suggests that EM ex-China growth is likely to improve, but macro investors are skeptical and demand proof.

• Valuation and Earnings: EM valuations and earnings growth are mixed, with some markets showing potential for improvement.

• FX Carry and Returns: FX carry and returns vary across EM countries, with some showing potential for appreciation.

Investment Recommendations

• MSCI EM vs. MSCI EAFE: This is highlighted as a preferred relative value trade.
• Target and Stop Levels: The target for MSCI EM is raised to 110, and the stop is increased to 101.
• Focus on Relative Value: The report emphasizes that relative value strategies are better than chasing a beta rally.

Conclusion

The report concludes that the current rally in EM assets is short-lived and not sustainable unless there is genuine growth improvement. It recommends a relative value approach, focusing on EM equities and local bonds, and highlights the importance of monitoring macroeconomic indicators and investor sentiment.