According to an analysis by Goldman Sachs Group Inc, emerging market assets may have bottomed last month and the rally seen in July is likely the start of a more sustained rebound through the second half of this year.
Their key recommendations are:
- Latin American Equities and Currencies
- Preference for High Yield Debt relative to emerging market credit, tipping Mexico, Lebanon and Egypt
- Best local bond markets include Brazil, Peru and Colombia, where yield curves are relatively steeper
- All South African assets are favoured except equities
- Recommends avoiding Turkey’s local bond market, citing significant political risks
- Keeps underweight on Asian equities, while trade tensions with the US remain high
According to Goldman with its analysis going back to 1988, the conclusion drawn are:
- The median annual drawdown for equities over that period has been around 19% and 9% for foreign exchange. In that time, a typical sell-off results in a 130 basis point increase in credit spreads and a move wider of 80 basis points in local rates.
- Typically it’s more painful being early in equity or currency trades. Credit markets, on the other hand, offer a better trade-off between risk and reward.
Bloomberg, 2018-07-26, Gregor Stuart Hunter, “Emerging Markets May Have Bottomed” Goldman Sachs Says