Emerging market (EM) assets are set to make a comeback as US growth converge with the rest of the world, according to Goldman Sachs Asset Management.
While expansion of global economy is expected to continue, the period of strong US economic outperformance and the associated divergence in regional growth rates is now behind us.
‘We expect renewed convergence,’ it said in its latest investment note.
In China, the broad policy support may eventually generate a period of positive surprises.
In EM outside of China, Goldman Sachs believes the reversal of a number of idiosyncratic drags on growth, together with the still early stage nature of the recovery in several EM economies, could lift overall growth.
‘In our view, the weakness in EM assets reflects country-specific challenges rather than a broad EM crisis,’ Goldman Sachs said.
It added: ‘The bigger picture is one of global growth converging at healthy levels after a period defined by US exceptionalism.’
Goldman Sachs said it sees the shift to convergence – with US growth moderating while other economies stabilise – as significant.
‘We think EM assets will be the clearest beneficiary, supported by our view that market fears of trade tensions and EM contagion are likely to prove overdone.'
More broadly, Goldman Sachs said it generally prefers equities over credit, and credit over rates.
However, given the substantial valuation gap that has re-emerged after the EM sell-off, Goldman Sachs said it is bullish on EM currencies vs the dollar.
‘We think the strength of the US dollar has been driven by growth divergence and as that turns we would expect the strength to start to fade,’ it said.