“The first lesson is that you want to treat EMs and EMs ex-China differently,” Goldman’s Kamakshya Trivedi said. — Bloomberg
BEIJING: Goldman Sachs Group Inc’s head of global currency, rates and emerging markets strategy says he’s learned two main lessons from one of the biggest and most common bad calls of 2023: the bet on post-pandemic China’s reopening boom.
At the beginning of the year, Goldman was among the chorus of Wall Street banks pinning their hopes on a bright 2023, in part on recovery in China, with strategists including Kinger Lau predicting a 15% rally in the Chinese stock market.
The expectation was that a bounce in the world’s second-largest economy would be the wave that lifted all boats, helping emerging markets (EMs) globally to a banner year.
Instead, Chinese stocks fell more than 15%, while many EMs did just fine.
“The first lesson is that you want to treat EMs and EMs ex-China differently,” Goldman’s Kamakshya Trivedi said.
“Chinese assets have been pretty uncorrelated with a lot of other EM assets for some time.
“That has been true on the equity side and also on the fixed-income side.
“The second lesson,” he said, “is about the resilience of broader emerging markets, even in the face of an aggressive hiking cycle by the US Federal Reserve, a strong US dollar and a slowing China.
“That is a pretty bad combination of circumstances for EM assets, and despite that, EM assets have performed resiliently”.
Strip out China, in fact, and EM stocks have gained 16% this year, compared with just 4.4% for the MSCI emerging market benchmark index, where Chinese stocks are included, and account for nearly 30% of the total index by weight.
“From an EM standpoint, the biggest disappointment was the continued deceleration that we saw in China despite the cheap valuations, and that was a drag on EM assets all year,” Trivedi said.
The main reason for the resilience seen in developing country markets was policy action, Trivedi said.
Emerging market central banks hiked interest rates early, proactively and aggressively to address the coming inflationary shock, he added.
“The fact that they were ahead of the game compared to a lot of developed markets, I think, definitely helped them.”
“That macro combination is looking much better than what it has been, and that is a pretty positive thing for EM assets. We expect to see positive total returns in EM assets next year.” — Bloomberg
