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Emerging Markets: After correcting imbalances, better prospects beyond – 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 for about three years they have argued that EM economies needed to undertake an adjustment to regain external and internal balance, and that weaker currencies were an important part of that adjustment.

    Key Quotes

    “These adjustments have progressed unevenly across EMs: on the external balance front, more adjustment is required in the cases of Colombia, South Africa and Turkey, where current account deficits are still substantial; on the internal balance front, where inflation is still significantly below target, we see the need for easier financial conditions in places like South Korea, Thailand, China and Israel. In all cases, our forecasts envisage significant further FX weakness.

    While rebalancing has clearly been painful in the face of weaker global trade growth, lower commodity prices and a slowing China, a number of EMs have successfully rebalanced over the past few years, and it is important to acknowledge that. In that sense, we would part ways with the extreme pessimism that we sometimes encounter about the long-term prospects for EM assets with little scope for light at the end of the tunnel.

    We take a subtly different view: the required adjustment that many EMs are undergoing is painful in a macro and market sense, but on the other side there is the prospect of improved growth and better returns, even if it is not a rerun of the roaring 2000s. Poland (through 2011 and 2012), India (through 2013) and Russia (through 2014) have all undergone such adjustments. And, typically, after a painful bout of high real rates, soft growth and weaker currencies, they have tended to graduate towards more stable currencies (we forecast EUR/PLN at 4.10 in 12 months, $/INR at 67.5 and $/RUB at 66), with the prospect of better growth and continued equity market outperformance.

    Even Brazil – the focus of much EM-related pessimism these days – has been going through an analogous painful macro and market adjustment in 2015, with real rates having moved to restrictive levels and a currency that is now at much more competitive levels. Given the additional political uncertainty in Brazil, it is notable that the depreciation in the real trade-weighted BRL over the past three years is not much more than for the AUD, another commodity currency that has needed to absorb the end of the commodity boom. While the potential for overshooting remains – especially if the political situation worsens dramatically – at 4.30 our $/BRL forecasts are now in line with the forwards.”
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