Howmuchgrowthhasbeen(p)repriced?OurGrowthFactorssuggestEMnmarketsarepricing~50bpofgrowthacceleration,whichisareversalof1/3ofthedecelerationfromlastyear.Wethinkwillbehardtodeliverandsuspectgrowthwilllikely“firm”ratherthanre-acceleratequickly.WeseemodestfurtherupsidetoEMequities(MSCIEMto1100),andriskstowardsmorecreditspreadcompressionthanourinitialtarget(EMBI360bpatend-2019),andmodestFXupside(median1%spotappreciationfromcurrent).2019hasbeenayearofEM“countrystories”.Therallyhasbeenbroad-basednacrossassetclasses,butwefindthatcountrycoherencehasbeenhighthisyear.Thatis,severalEMshaveoutperformedacrossallassetclasseswhereasothershaveunderperformeduniformly.Inshort,weremainfocusedon“pickingtherightcountries”ratherthanbroadbetaexposureinEM.BacktestingValuation:apro-cyclicalsignal.Whenconsideringvaluationnsignalsusingsimpleratiosrelativetohistory(asopposedtodeeperfairvaluemodels),wefindthat‘inexpensive’EMsoutperformovertimeapartfromdrawdowns.EMsthatscreenas‘expensive’onthesemetricstendtobedefensive(andlikelytradeatapremiumbecauseoftheirdefensivenature);givenourconstructiveEMview,weprefervalueEMs.Currently,onacross-assetbasis,Mexico,Turkey,SouthAfrica,andRussianscreenastheleastexpensiveEMs.BrazilscreensasthemostexpensiveEMonacross-assetbasis.Infixedincome,weretainatoptraderecommendationtoreceiveMXN,ZAR,andCOPratesvs.lowyielders(whichallscreenasexpensiveEMsonarelativebasis).Thehighyielderseachhavepoliticalandidiosyncraticrisksassociatedwiththem,butourback-testsuggeststhevaluationdiscountwarrantsaportfolio-approachandtheyshouldoutperformasacluster.EquityExposure:FocusonAsia,lessonBrazil.WeretainourviewthatBrazilnwillunderperformEMpeerstacticallyuntilreformprogressismoreconcrete;ourAsiastrategistsremainpositiveonChina.Givenourviewthatglobalgrowth(andespeciallyUS)islikelytostabilize,wefindthatTaiwanandKoreatradeatadiscountrelativetotheirglobalbetasandseetacticalcatch-uproominthesetwoglobalcyclicalmarkets.CaesarMaasry+1(212)902-8763|caesar.maasry@gs.comGoldmanSachs&Co....
