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2022 - Q1

Renaissance - Redefining Research

New beginnings & a renaissance for Synaptic

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Emerging opportunities in emerging markets. A diversified emerging market strategy may offer attractive return potential

Goldman Sachs

Goldman Sachs Asset ManagementMost emerging market (EM) economies struggled in 2021 as slow vaccine deployment and the spread of the Delta variant tempered their recovery. Risks remain, but we see potential for a rebound—particularly if, as we expect, higher interest rates cause developed-market GDP to revert to trend.

"As DM countries start to withdraw aggressive monetary and fiscal stimulus and EM growth picks up, we expect the growth gap between the two, currently at its narrowest point in at least 20 years, to widen."

We think EM economies may be poised for stronger growth in 2022, particularly those at earlier stages of reopening. As DM countries start to withdraw aggressive monetary and fiscal stimulus and EM growth picks up, we expect the growth gap between the two, currently at its narrowest point in at least 20 years, to widen.

An active EM equity strategy may have the potential to outperform a US one over the next decade as EM populations grow and innovation expands. Equity valuations are attractive on a relative basis and earnings growth is running at a decade high. The region is home to some of the world's best-performing companies, though many may not be captured in standard benchmarks, which overweight state-owned enterprises and volatile export-driven industries. An active approach can help investors increase exposure to companies benefitting from secular growth trends.

Treating China separately may help create more efficient EM equity portfolios. China's weight in the MSCI EM Index has doubled over the past five years and could exceed 40% five years from now. An EM ex-China equity strategy offers sector and macroeconomic diversification; for example, EM ex-China names tilt toward semiconductors and tech hardware while China leans toward the consumer retail and internet sectors. This can affect performance; the MSCI EM ex-China Index outperformed the MSCI China Index by 32 percentage points in 2021.

The income potential of EM debt may help to enhance the stability of portfolio returns in a challenging investment environment. EM debt has offered attractive nominal and real yields relative to comparable DM debt. Country selection remains important, as economic and political risks vary. Some assets may struggle if inflation causes the Fed to reduce asset purchases and raise rates more rapidly than expected. But improved EM current account balances mean many EM countries are better prepared to withstand modest capital flight than they were in the past.

Investment themes to consider:

EM ex-China

Those with a long time horizon might consider coupling an EM ex-China equity allocation with a China all-shares strategy (onshore A-shares plus offshore shares) to seek to capture the full opportunity set in both markets. This can provide diversification benefits while potentially enhancing alpha opportunities. An EM ex-China allocation, for example, offers deeper access to smaller EM countries and potential alpha opportunities in small-and mid-cap stocks. It can also allow investors to tilt toward or away from China depending on prevailing market conditions. And carving out China exposure gives investors more control over the size of their allocation to the country.

Emerging market debt

Dedicated exposure to EM corporate bonds may help boost income potential and strengthen portfolio return stability. They may also make sense for investors looking to enhance their DM credit allocations. Selective exposure to high-income strategies that are less reliant on price appreciation may be a good way to bolster return potential. We see compelling potential opportunities in Asia high-yield bonds, which have delivered strong risk-adjusted return relative to comparable DM assets and have lower interest-rate duration. Strong economic fundaments in the region may temper default risk.

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General Disclosures

The views expressed herein are as December 31, 2021 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

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