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Investment Ideas 2022

EMERGING OPPORTUNITIES IN EMERGING MARKETS

A diversified emerging market strategy may offer attractive return potential.

Most 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.

 

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 (Exhibit 12) and earnings growth is running at a decade-high. The region is home to some of the world's best-performing companies (Exhibit 13), 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.

Exhibit 12: Current Price to Book (P/B) Levels are near 20 year lows vs the US 

Source: Bloomberg, FactSet, DataStream, Goldman Sachs Asset Management. As of December 31, 2021. 

Exhibit 13: EM is home to some of the best-performing companies 

Source: Bloomberg and Goldman Sachs Asset Management. As of November 30, 2021. 

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 Ideas 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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Risk Considerations

Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.

High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.

Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.

Glossary

Alpha: Alpha refers to returns in excess of the benchmark return.

GDP: Gross Domestic Product (GDP) is the value of finished goods and services produced within a country's borders over one year.

MSCI Emerging Market Index: The MSCI Emerging Markets Equity Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

MSCI Europe Index: The MSCI Europe Index is a free-float adjusted market capitalization index that measures the performance of large- and mid-cap equities across 15 developed countries in Europe.

S&P 500 Index: The S&P 500 Index is the Standard & Poor's 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

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.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property and a service mark of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P) and is licensed for use by Goldman Sachs. Neither MSCI, S&P nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. 

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. 

References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. 

Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant. 

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Date of First Use: January 12, 2022

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