With emerging market equities approaching their all-time highs, Goldman Sachs is taking the opportunity to reinforce their bullish posture on the sector. They believe emerging markets should outperform developed market equities as the tightening cycle favors emerging markets. This rounds out their bullishness on commodities (see here), Asia-ex Japan (see here) and equities in general (see here). In the recent note they highlighted their approach:
EM equities to start outperforming again
We believe that the growth/inflation balance should improve in EM. The early part of the tightening cycle is over in EM and the growth momentum is likely to accelerate for the rest of the year. Meanwhile, DM markets in their majority have yet to see an acceleration in the tightening process. We expect the ECB to start its hike cycle in April while the BOE should make its first move in May.
We recommend different ways to get exposed to EM through DM equities
We believe that European companies with high sales exposure to EM should start outperforming European companies exposed to domestic market and recommend a long position in GSSTBRIC vs. a short position in GSSTDOME.
An alternative to a long GSSTBRIC could be to invest in our China basket, GSSTCHNA, as our Asia Portfolio Strategy team just upgraded China to overweight.
For a more global portfolio, we recommend to buy our DM BRIC Nifty 50 stocks which include companies from Europe, the US, Japan, Korea and Australia with high exposure to EM. We recommend this basket against a short in MSCI World.
Finally, we initiate a recommendation to be long our UK international exposure basket (GSSTUKIE) paired with a short in our UK domestic basket (GSSTUKDE).
Source: Goldman Sachs
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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