Goldman Sachs Predicts Speedier Return to Growth for Emerging Markets

Goldman Sachs (GS) is essentially predicting a lost decade for most of the developed world.

The graphs below are from the Goldman Sachs Global Economics team (Full report):
Click images to enlarge




Thoughts:

• Output gap will not be filled till almost 2016-2018 for most of the developed economies.
• Unemployment must remain high till this time. Chimes in nicely with PIMCO's Bill Gross who feels that unemployment will remain high on a structural basis.
• I have a hard time believing the inflation theme given such data points. At the very least, inflation is 3-4 years away.
  
• Mexico looks like it will suffer because of its proximity to the US and the swine flu.
• Indonesia and Australia are interesting non-mainstream bullish ideas.
• It clearly helps to be a commodity exporter. The commodity super cycle is alive and well.
  
• Clearly, China and India look like the places to be.
• I’m not convinced as to why UK should recover before US. The UK real estate market has been described by Jeremy Grantham as the only remaining asset class bubble, and I would generally expect Europe to lag US in recovery. The chart below illustrates that the real estate markets in Europe have been lagging those in the US.

The main points can be summarized as follows:

• Emerging markets are likely to see a return to trend growth about six months before advanced economies. Similarly, emerging markets on average will close their output gaps about two years before advanced economies.
• Equities should move higher in the months ahead and long-dated equity vol is expensive relative to the improving macro backdrop.
• Countries that get back to trend growth sooner should see their currencies strengthen. (Good news for Indian rupee and Chinese Yuan.)
• Emerging markets, particularly Asia, should offer more opportunities for outperformance for equities and forex, and could support commodity prices, especially industrial metals.
• Suggests going long GBP and short EUR/GBP.
• Carry trades should prove popular because of smaller current account imbalances.
• Recommends Hong Kong (EWH), Taiwan (EWT) and Chinese (FXI) equity markets.

2009 so far looks like a repeat of the weak dollar, strong commodities, strong emerging markets story. For what it's worth, decoupling seems to be back in vogue.

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