Goldman Sachs Sees Downside Risks for Emerging Markets in 2017

  • Local-currency bond rally to slow, the bank said in report
  • Chile peso, South Africa rand poised to rally: Goldman Sachs

What to Watch for in Emerging Markets

Investing in emerging markets will be trickier in 2017, says Goldman Sachs Group Inc.

The New York-based bank laid out its expectations for developing nations in a report Friday. Below are some of the highlights.

1. Downside risks have increased after Donald Trump won the U.S presidential election, which means a rally in local-currency bonds so far this year is unlikely to be repeated, Goldman Sachs said. Still, investors may want to bet on currencies that are less exposed to protectionist trade policies. The bank recommends going long Brazil’s real versus iron ore. Chile’s peso and South Africa’s rand may also appreciate “significantly” in 2017 and the nations’ current-account deficit may shrink next year.

2. Turkey’s lira and Malaysian ringgit may not fare as well as Goldman Sachs expects to see “discontinuous foreign exchange depreciation if we see a proper rates tantrum over the next 12 months.”

3. Stability in China is Goldman Sachs’s baseline scenario, but it never hurts to hedge. In addition to shorting the onshore yuan directly, the bank said it makes sense to protect against risks in low-yielding Asian currencies like the South Korean won, Malaysian ringgit and the Singapore dollar.

4. Goldman Sachs said investors should brace for oil-related shocks in the short term and the risk of higher interest rates in the long run. On the bright side, the bank said corporate earnings across developing nations should increase.

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