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EM growth to pick up, even if not like in the old – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 31, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) - Research Team at Goldman Sachs, suggests that after six years of sequentially declining EM growth (2010-2015), their EM economists expect a pick-up in 2016.

    Key Quotes

    “Among the BRICs, the continued slowing in China is likely to be offset to some extent by a sequential improvement in India, while in Russia we expect the contraction of late-2014 and 2015 to end finally in the fourth quarter of 2015, and even in Brazil the pace of contraction is likely to slow in 2016 relative to 2015. In the rest of the EM, we expect robust growth rates in 2016 in Mexico and Central and Eastern Europe, specifically Poland and Hungary, with a more mixed picture in Asia.

    Despite this pick-up, EM growth will remain at a below-trend pace as a number of global and local tailwinds that typically drive EM accelerations are going to be either neutral or outright headwinds. While the DM recovery has been better than the popular perception, with the Fed intent on gradually slowing the US expansion and Japan only just recovering from its technical recession in 2015, it is hard to see EMs moving to an above-trend pace by simply piggybacking off DM. We do expect Euro area growth to accelerate to an above trend pace, which should help push the CEE economies to trend growth rates and beyond. But, aside from that, most EMs will face an external backdrop of relatively flat DM growth rates and higher US interest rates in 2016.

    ‘Low-for-long’ commodity prices mean there will be no tailwind for commodity producers either (although the headwinds in some cases may be less intense), and commodity importers – China and Korea are the prime examples – will continue to wrestle with large debt overhangs that will act as a brake on growth for several quarters. Credible cases of structural reforms that could boost EM growth are also few and far between, and even in India and Mexico the results have been disappointing.

    From an investment standpoint, the key issue is whether an improvement in growth will be enough, even when it is below trend. Given the widespread bearishness on EM, sluggish growth may help to limit the tail of possible downside scenarios, and therefore lower the required premium across EM assets, and 2016 could be the year EM assets put in a bottom and start to find their feet. We would expect more EM currencies to start exhibiting stability on a trade-weighted basis, even though some EM FX depreciation versus the USD is still likely. Likewise, a clearer indication of growth (and earnings) acceleration down the road would be necessary for EM equities to outperform DM markets strongly (rather than simply keeping pace with them).”
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