Goldman Sachs sees emerging markets exposure as the best defence against a hard landing for the worl...
Goldman Sachs sees emerging markets exposure as the best defence against a hard landing for the world economy.
The group is forecasting a 'no landing' scenario due to persisting severe financial imbalances in the US, Euroland and Japanese economies.
Goldmans favours Asia as it is the best positioned to cope with a hard landing, while Latin America looks cheap due to its vulnerability to a hard landing.
Gavyn Davis, chief international economist at the group, said: "Despite the slowdown in US growth observed in the latest quarter, we remain of the view that the G3 central banks will opt to tighten policy further, when they realise that the growth of real GDP has not yet been knocked very far below the 4% rate seen in the recent past."
The group is forecasting a further 100bp rise in interest rates in the US, much of it coming next year, and a 50bp rise in Euroland, much or all of which to come later this year.
This should be sufficient for a moderate slowdown in global real GDP growth in the course of 2001 but it is doubtful this will constitute a soft landing, Davies said.
He added: "If we simply examine the GDP and inflation profile, the answer appears to be yes. A further moderate tightening in monetary conditions, which is not forecast to be sufficient to undermine the level of equity markets, is shown in our main forecast to slow the OECD economies down to their trend growth rates by the end of next year.
"This, surely, is a soft landing. The problem with this comfortable conclusion, however, is that extremely significant financial imbalances would persist during such an economic scenario for 2000.
"The exceptional private sector financial deficit in the US, along with the equally exceptional surplus in Japan, will continue to result in historically large current account imbalances, which could potentially disrupt the world economy in the next 18 months."
The group's anticipation of rises in US rates also shows the group's bearish attitude towards the US bond market, especially for 2001. In Euroland, by contrast, Davies said that the anticipated tightening by the ECB is already largely discounted in bond prices so the forecasts are not very different from those implied by the forward market.
He said: "In Japan, our expectation of a one-shot tightening by the Bank of Japan, introduced in third quarter 2000, is also very close to the view currently incorporated in the bond curve."
In light of this stance the group is favouring emerging market bonds as well as emerging market equities. Davies said: "The continued presence of favourable global economic and technical conditions is the main reason for us to favour Latin American debt, as this sector is cheap because of its external vulnerability to a hard-landing scenario.
"We favour Brazil and Mexico, while Venezuela represents a good oil carry trade. We continue to recommend longs in Russia."
Goldman Sachs is overweighting emerging market equities in its global portfolios, which it believes could deliver high rates of return over the next 12 months.
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