The positive outlook for US economic growth will provide a strong backdrop for emerging market growth as well as the rest of the world.
That’s the view of Prashant Khemka, managing director, CIO of global emerging markets equity at Goldman Sachs Asset Management.
Speaking at a media roundtable held on Tuesday in Singapore, he said part of his reasons for backing EMs is due to the positive outlook of the US economic growth.
‘The US is the largest economy in the world. It is very hard to imagine a faster or accelerated US economic growth will not spill over to the rest of the world,’ Khemka said.
‘There could be increased trade protectionism, but the spillover effect of faster US economic growth would far outweigh the negativity of increased protectionism. Such spillover effect would be an important positive backdrop from a macro perspective.’
Furthermore, he said that the impact of trade protectionism would differ from country to country, though not every country would have the same impact.
He also said certain countries might face bigger challenges compared to what they used to face during the past, for instance, possibly in countries such as Mexico and China.
Positive on EMs
Apart from a positive outlook for US economic growth, a combination of good earnings growth trajectory and attractive valuations in EMs have also reinforced his stance towards the region.
‘At least for the past four years, we have been positive on emerging markets,’ he said.
Khemka said earnings growth for EMs has been very sluggish over the past five years partly due to the collapse in commodity prices. However, since early last year, markets have seen an improvement in earnings, not only in commodity, but also in banking and industrial sectors.
‘Valuation levels are not demanding. They are either in line with the historical averages, or below historical averages, it depends on which metric you are looking at -- either in absolute terms, or relative terms compared to the developed markets.’
Avoiding government-owned entities
Given the firm’s focus on corporate governance, Khemka said it is a struggle to find good investment opportunities in government-owned entities, as there are severe challenges in corporate governance aspect when it comes to government-owned / state-owned entities.
‘As a consequence of this, we tend to have less exposure to the sectors which are dominated globally by government ownership,’ said Khemka. ‘Commodity is one such sector, particularly energy. It is a sector that has the highest government ownership.’
In terms of asset allocation by country, India accounted for 14.7% of Khemka’s portfolio, Goldman Sachs Emerging Markets Equity Portfolio, as of January 31.
‘When it comes to India, the country tends to have a large number of mid-caps in the investment universe and it also has one of the lowest government ownerships in the market,’ said Khemka.
‘That’s why it fits in our creteria when we are looking for opportunities and therefore, India tends to be one of the highest weight in our portfolio.’
China, despite being a country with the highest government ownership of firms, where two-thirds of the market is based on state-owned entities, occupies the largest position in his portfolio (23.4%) from an absolute investment size perspective.
‘There are a lot of very well-run private enterprises outside of the SOEs and we have a lot of investments in China for that.’
When it comes to bond markets that GSAM is backing for 2017, Salman Niaz, portfolio manager, emerging markets – fixed income, said in the context of Asia, he likes Indonesia, due to its market reform story.
Globally, he finds Brazil and Poland attractive. ‘We like Brazil. We think that the Brazil central bank cut rates by 75 basis points without losing its credibility. We also like Poland, because we like the valuation, the economic condition, given the link it has with the eurozone.’