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23 Feb 2016
EM FX has entered undervaluation territory – Goldman Sachs
Research Team at Goldman Sachs, suggests that the EM currencies are no longer overvalued, as they were coming into the ‘taper tantrum’ of 2013.
Key Quotes
“They are slightly undervalued as a group based on our revamped GSDEER, as well as on a FEER basis. In other words, valuations for EM currencies have moved into a supportive zone for the first time in several years, especially after the most recent EM FX depreciation earlier this year. The current signal for the 2-year-ahead EM FX performance is thus for stability, or even a slight appreciation, against the Dollar over the next two years. That said, valuations are not a sufficient condition by themselves to turn bullish.
We would want to see improved growth and a better environment for capital inflows as well. But this analysis suggests that valuation (together with real carry) is beginning to turn supportive for the first time in several years. The key market debate is thus whether the expected returns associated with carry and valuations outweigh the elevated risks that prevail currently.”
Key Quotes
“They are slightly undervalued as a group based on our revamped GSDEER, as well as on a FEER basis. In other words, valuations for EM currencies have moved into a supportive zone for the first time in several years, especially after the most recent EM FX depreciation earlier this year. The current signal for the 2-year-ahead EM FX performance is thus for stability, or even a slight appreciation, against the Dollar over the next two years. That said, valuations are not a sufficient condition by themselves to turn bullish.
We would want to see improved growth and a better environment for capital inflows as well. But this analysis suggests that valuation (together with real carry) is beginning to turn supportive for the first time in several years. The key market debate is thus whether the expected returns associated with carry and valuations outweigh the elevated risks that prevail currently.”