20180119-高盛-Reflation_resurgence_and_the_EM__melt-up__trade_23页_1mb

EM Strategy Views Summary

Core Content

The document outlines the current state and outlook for Emerging Markets (EM) assets, particularly focusing on equity and credit markets, in the context of a resurging reflation trend in Developed Markets (DM). It argues that EM assets are not in danger of a "melt-up" and that the recent performance is driven by improving fundamentals rather than speculative overvaluation.

Main Points

• Reflation Resurgence: Reflation is resurging in DM, characterized by rising growth, inflation expectations, and a flattening yield curve. This has been associated with a positive outlook for risky assets.
• EM Performance Drivers: EM equities have shown strong performance due to improving earnings, not just valuation increases. The 34% rise in MSCI EM in 2017 was mainly attributed to local currency EPS growth (22%) and FX appreciation (5%), with only a small contribution from valuations.
• Valuation Room for EM: EM valuations have room to improve compared to DM. A historical "growth premium" in DM cyclicals vs defensives has not translated to EM, suggesting EM is undervalued and has potential for a "catch-up" trade.
• Credit Spreads: EM credit spreads are justified by economic activity levels and are not indicative of a speculative "melt-up." They are in line with growth, and there is potential for further tightening.
• Macro Forecasts: EM economies are expected to show growth in GDP, inflation, and policy rates, with some countries projected to outperform others. The EM growth story is seen as more promising than the DM one.
• FX Outlook: EM currencies are forecasted to appreciate, with some showing potential overvaluation or undervaluation depending on the market's fair value and carry trade dynamics.

Key Information

EM Equity Performance

• Earnings Growth: EM equities are primarily driven by earnings growth rather than valuation changes.
• P/E and P/B Ratios: EM valuations are relatively low compared to DM, with room for improvement.
• Catch-Up Potential: EM equities are expected to outperform DM as the growth premium in DM does not yet translate to EM.

EM Credit Spreads

• Current Spread Levels: EM credit spreads are tight but justified by growth and economic activity.
• Valuation Justification: EM credit spreads are in line with historical levels relative to growth, suggesting no speculative overvaluation.

Macro Forecasts

• GDP Growth: EM economies are expected to grow at a faster rate than DM, with notable growth projections for countries like India, China, and Russia.
• Inflation and Policy Rates: Inflation is expected to rise, and policy rates are projected to increase, reflecting a more accommodative stance.
• FX Forecasts: EM currencies are expected to appreciate, with some showing overvaluation and others undervaluation.

Cross-Asset Valuation

• Valuation Metrics: EM assets are evaluated using P/E, P/B, and D/Y ratios, with EM showing lower valuations than DM.
• Z-Score Analysis: EM assets have lower Z-scores compared to DM, indicating higher risk but also potential for growth.

Conclusion

The document suggests that EM assets are well-positioned for continued growth, driven by strong earnings and economic fundamentals. While there are concerns about reflation in DM and potential "melt-up" risks, the analysis indicates that EM is not at risk of such scenarios and may offer significant upside due to its undervaluation and growth potential. The EM "catch-up" trade is highlighted as a promising opportunity, especially in comparison to the aging US corporate credit cycle.