Goldman Sachs rethinks emerging markets after painful Chinese lesson

Goldman Sachs Group’s head of global currencies, interest rates, and emerging markets strategy said he learned two key lessons from one of the biggest and most common bad predictions in 2023: betting on China’s post-pandemic reopening.

At the start of last year, Goldman Sachs was among the Wall Street group of banks that pinned their hopes for a bright 2023 in part on China’s recovery, with strategists, including Kinger Lau, predicting a 15% rise in the Chinese stock market.

The expectation was that the recovery of the world’s second-largest economy would have a positive impact on all emerging markets, helping them globally to achieve a remarkable year.

Instead, Chinese stocks fell more than 15%, while many emerging markets performed well.

“The first lesson is that you want to treat emerging markets differently than you exclude China, as Chinese assets have been largely untied to many other emerging market assets for some time, and this has been true both in terms of the equity market as well as in terms of fixed income assets,” said Kamakshya Trivedi of Goldman Bank.

“The second lesson concerns the ability of broader emerging markets to survive, even in the face of the US Federal Reserve’s strong interest rate hike cycle, the strengthening of the US dollar, and China’s slowdown. This is a very bad mix of conditions for emerging market assets, and yet emerging market assets have performed strongly,” he added.

Excluding China, emerging market equities have risen 16% this year, compared to just 4.4% for the MSCI Emerging Markets Index, which includes Chinese equities, which account for almost 30% of the index’s total weight.

“From an emerging market perspective, the biggest frustrating thing has been the continued slowdown we have seen in China despite cheap valuations, which has weighed on emerging market assets throughout the year,” Trivedi said.

Trivedi argues that the main reason for the resilience of developing-country markets is monetary policy measures. Emerging market central banks raised interest rates early, proactively, and aggressively to address the upcoming inflation crisis.