2020-Markets-Outlook-Caesar-Maasry.pdf - ABANA

2020 Market Outlook

January 2020

Caesar Maasry Goldman Sachs and Co. LLC +1 (212) 902 8763 [email protected]

Head of EM Cross-Asset Strategy

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest

that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.

Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc.

2Global Investment Research

Source: FactSet. Datastream, Haver, Goldman Sachs Global Investment Research

Longest Bull Cycle… but cycles don’t die of old age

3Global Investment ResearchSource: FactSet. Datastream, Haver, Goldman Sachs Global Investment Research

The “QE” era has driven assets not ‘real economy’ prices.


For the US, 2020 is an important election year...

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20 %

-12 -9 -6 -3 0 3 6 9 12

Months around presidential election

S&P 500 P/E valuation aroundUS presidential elections

(indexed to P/E 12 months before election) 80th %ile

20th %ile

10-episodeaverage

Current cycle

Election Day


We don’t forecast election outcomes, but approval

ratings and per capita growth seem correlated

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Average real GDP growth per capita (2-year avg. thru Q3 of election year)

Incumbent WINS

Incumbent LOSES

Carter(1980)

H.W. Bush(1992)

W. Bush(2004)

Obama(2012)

Clinton(1996)

Eisenhower(1956)

Nixon(1972)

Johnson(1964)

Reagan(1984)

Trump(2020)

Current presidentialnet approval: -9 pp

2019 avg. real GDPgrowth per capita: 1.7%


Looking globally, the main focus is a slowing growth rate


… and policy has been extraordinarily ‘supportive’.



Growth cycle drives EM…we are still early in the cycle.But ‘this time is different’ given the late-cycle nature of the US

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EM vs. DM(Relative Equity

Performance Index)

BullCycle

1969-80

BearCycle

1980-86

BullCycle

1986-94BearCycle

1994-01

BullCycle

2001-10

BearCycle

2010-16

EM vs. DM Growth Differential

(3yr avg, RHS)

BullCycle2016-?


Source: FactSet, Datastream, Goldman Sachs Global Investment Research

(3) Valuation & PositioningEM assets valuations are not as attractive as end-2018 but generally

have room to run relative to end-2017 highs

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1.40EM valuations vs End-2017 and 2018

z-scoresince 2003

EQUITY (NTM P/E) CREDIT (spread level)FX (2/3 GSDEER + 1/3 GSFEER) Rates (real rate)

More Expensivevs. History

End-2018

Current12.3x

10.5x-7.8%

-8.4%

330 bps

416 bps

1.7%

1.3%

End-2017

12.6x

-1.6%

286 bps

1.8%



EM Rates have more cushion in 2020

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Front End(1yr - Policy Rate)

US

EM Average

GlobalSell-off

USElection

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Belly Pricing(3yr - 1yr)

US

EM Average

Sharp re-pricingof the mediumterm EM cycle


We see modest upside in EM in 2020 but “Left Tails” are

emerging in equity and sovereign credit

Source: Goldman Sachs Global Investment Research

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Share of MSCI EMstocks tradingbelow 1x P/B

(RHS)

Share of EMBImembers with

spreads rising >

500bp in a year

44%

29%

17%16%

17%19%

-26%

39%

15%

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16%

-6% 0%-9%

9%

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-9%

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0

EM Returns (avg. of MSCI EM, GBI-EM, EMBIG-DIV in USD)

pre-GFC avg = 20%

post-GFCavg = 4%

12Global Investment ResearchSource: Goldman Sachs, Goldman Sachs Global Investment Research

Appendix for Q&A

13Global Investment ResearchSource: Goldman Sachs, Goldman Sachs Global Investment Research

EM Targets – modest upside over 12-months

80

85

90

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105

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Ma

y-15

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Ma

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y-19

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1

EM FX(vs. USD)

Target

spot -0.1%(TR 1.4%)

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MSCI EM Target1130

3% TR

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9

Ma

y-19

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Ma

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Jan-2

1

EMBI(Spread)

Target310bp

5.00%

5.25%

5.50%

5.75%

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%

7.50%

Jan-1

5

Ma

y-15

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6

Ma

y-16

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7

Ma

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Ma

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9

Ma

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Ma

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Sep

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1

GBI-EM Rates(Broad-Div, ~5yr)

Target

5.5%


MENA equities relatively expensive vs. other EMs

Source: FactSet, Datastream, Haver, Goldman Sachs Global Investment Research

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0Valuation of Equities

(P/E, P/B, Dividend Yield relative to history)


EM valuation: A broad sweep across assets

Source: FactSet, Datastream, Haver, Goldman Sachs Global Investment Research

BRL THB TWD PLN PHP CNY HUF PEN INR KRW RUB CZK IDR COP MYR CLP MXN ZAR TRY ARS EMEquity PE (NTM) 12.6x 15.5x 15.9x 10.8x 15.7x 11.4x 9.2x 13.2x 18.7x 11.1x 6.3x 11.3x 14.8x 11.0x 15.6x 14.0x 13.4x 11.3x 6.2x 9.9x 12.2x

FX vs GS FV (9%) +6% (1%) (18%) +6% (7%) (19%) (3%) +2% +5% +1% (6%) +7% (14%) (8%) (18%) (8%) (16%) (37%) (58%) (10%)

Credit Spread 124bp - - 63bp 41bp 40bp 78bp 57bp 81bp - 70bp - 74bp 90bp 42bp 56bp 91bp 186bp 318bp 10521bp 324bp

Bonds Real 10yr 3.6% 0.6% -0.3% -0.8% 2.1% 0.8% -1.4% 2.7% 3.1% 0.5% 2.7% -0.9% 3.9% 3.4% 1.9% 0.3% 4.0% 5.1% 0.2% -3.4% 1.7%

Equity Z-Score 0.67 0.61 0.42 (0.43) 0.01 0.06 (0.09) (0.23) 0.25 (0.52) (0.97) (0.55) (0.25) (0.66) (0.77) (1.85) (1.60) (0.78) (1.26) (0.36) (0.04)

FX Z-Score (0.05) 0.86 0.85 (1.19) 1.09 0.36 (1.24) 0.18 0.52 0.54 0.40 (0.15) 0.49 (0.70) (0.07) (1.47) (0.63) (0.36) (2.83) (8.26) (0.58)

Credit Z-Score 0.78 - - 0.67 1.16 1.36 1.06 1.14 1.30 - 1.12 - 0.94 0.89 1.43 0.73 0.72 0.19 (0.86) (6.00) 0.32

Bonds Z-Score 1.99 0.67 0.52 3.01 (0.26) 0.17 2.12 0.72 (0.64) 0.54 (0.15) 0.98 (0.92) 0.49 (0.78) 1.90 (0.89) (1.77) 0.98 (0.13) 1.33

AVG Z-Score 0.85 0.71 0.60 0.51 0.50 0.49 0.46 0.45 0.36 0.19 0.10 0.09 0.06 0.01 (0.05) (0.17) (0.60) (0.68) (0.99) (3.69) 0.26

(1.20)

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(0.80)

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(0.40)

(0.20)

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1.00

Average ValuationZ-Scores across Equity, FX, Credit, and local Bonds

Equity valuation includes P/E, P/B, D/Y in z-scoreReal bond yields using forward inflation expectations+ive z-score = overvaluation, -ive z-score = undervaluation

(Z-score relative to signal's history, not absolute valuation)


Source: Haver, Goldman Sachs Global Investment Research

Source: Haver, Datastream, Goldman Sachs Global Investment Research

Global Equity – pricing in strong growth pickup




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Fiscal Balance

High: CNY, HUF, KZT, RUB, GHS, TRY, UAH, HRK

Low: MYR, PAB, UYU, INR, BRL, EGP, ZAR, VND

Current Account

High: CNY, MYR, RUB, UYU, DOP, TRY, VND, HRK

Low: CLP, COP, PAB, IDR, EGP, GHS, ZAR, UAH

EM FX & Credit: Carry & Fiscal Defense

95

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100

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103

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105

106

Jan-1

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Fe

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Ma

r-1

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Jul-1

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19

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Dec-1

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0

Relative FX Performancewithin EM currencies(total returns)

Mean-Reversion(furthest from average

real-TWI over past 18-mo)

Short: INR, IDR, MXN, PHP, RUB, ZAR, TWD, THB

Long: BRL, CLP, CNY, COP, HUF, KRW, MYR, PLN

High Carry to VolEM FX

High: BRL, CLP, COP, HUF, MXN, RUB, ZAR,

Low: CNY, CZK, IDR, MYR, PEN, PHP, TWD, THB


“Japan-ification” a growing concern, particularly for Europe


Equity forecasting framework shows good returns

in Latin America over next twelve months

Source: MSCI, FactSet, I/B/E/S, Goldman Sachs Global Investment Research

Local Current GS Consensus PE NTM GS EPS 12m Total Return Forecast (%)

Index Value Target Target Current GS Target 12mo fcast Lcl Price FX Ret Div Yld USD Ret Ret vs vol

Argentina MERVAL 33,474 41,900 29,508 7.7 7.5 +28% +25% -30% +4% -9% -0.2

Brazil IBOV 108,529 120,000 111,251 12.8 12.8 +10% +11% +3% +4% +18% 0.4

Chile IPSA 4,652 4,750 5,298 14.7 14.2 +6% +2% +7% +4% +13% 0.3

China HSCEI 10,629 12,150 11,534 11.2 11.6 +10% +14% +2% +2% +19% 0.4

Colombia COLCAP 1,599 1,600 1,532 11.3 10.8 +6% +0% +4% +3% +7% 0.1

Czech Rep PX 1,085 1,050 1,301 11.4 11.0 +1% -3% +5% +6% +8% 0.2

Egypt EGX30 13,974 15,200 14,939 9.0 8.9 +10% +9% +0% +2% +11% 0.2

Greece ASE 898 970 942 12.7 13.0 +5% +8% +5% +3% +16% 0.3

Hungary BUX 44,314 44,000 45,845 9.4 8.8 +6% -1% +3% +2% +4% 0.1

India NIFTY 12,074 13,000 12,463 18.2 17.4 +13% +8% +1% +1% +10% 0.2

Indonesia JCI 6,071 6,500 6,457 15.1 14.8 +9% +7% +3% +3% +13% 0.3

Korea KOSPI 2,124 2,300 2,413 11.2 10.7 +13% +8% +0% +2% +11% 0.2

Malaysia FBMKLCI 1,591 1,590 1,744 15.8 15.0 +5% -0% +2% +3% +6% 0.1

Mexico MEXBOL 43,547 47,900 48,597 13.5 13.9 +7% +10% +5% +3% +19% 0.4

Pakistan KSE100 38,212 38,600 48,276 5.8 5.6 +4% +1% +0% +7% +8% 0.2

Peru SPBLGPT 19,982 22,400 23,451 13.0 13.4 +9% +12% +1% +3% +17% 0.3

Philippines PCOMP 7,772 8,500 8,236 15.4 15.6 +8% +9% -0% +2% +11% 0.2

Poland WIG 58,151 58,100 63,046 10.5 10.1 +4% -0% +8% +3% +11% 0.2

Qatar DSM 10,311 10,000 9,377 13.1 12.0 +6% -3% +0% +4% +1% 0.0

Russia IMOEX 2,955 3,350 3,038 6.4 6.6 +9% +13% +5% +7% +27% 0.6

Saudi Arabia SASEIDX 8,014 7,925 9,157 17.2 16.0 +6% -1% +0% +4% +3% 0.1

South Africa JALSH 56,748 63,100 63,066 12.1 12.3 +9% +11% +0% +3% +15% 0.3

Taiwan TWSE 11,562 11,700 10,627 16.5 15.5 +8% +1% +1% +4% +6% 0.1

Thailand SET 1,615 1,550 1,817 14.9 13.6 +5% -4% +2% +3% +1% 0.0

Turkey XU100 105,382 115,500 122,465 6.2 6.0 +13% +10% -11% +4% +2% 0.0

UAE DFMGI 2,705 2,875 2,970 9.1 9.5 +2% +7% +0% +5% +12% 0.2

EM MSCI EM 1,045 1,130 1,110 12.2 12.1 +8% +7% +2% +3% +10% 0.6


EM Credit: The main driver is also growth…

and spreads look fair relative to US HY



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EM vs. USGrowth Differential

(RHS, 3mma of CAI differential)

US HY lessEMBIG-DIV Spread



Looking across the EM universe --- hard currency debt

obligations appear well covered (with few exceptions)

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EG

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LA

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A

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UG

UA

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AZ

ER

BA

IJA

N

CR

OA

TIA

HO

ND

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AS

IND

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BO

LIV

IA

BR

AZ

IL

AN

GO

LA

IRA

Q

LE

BA

NO

N

PH

ILIP

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ES

CH

INA

CZ

EC

H R

EP

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LIC

KO

RE

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PE

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AN

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IWA

N

ST Liabilities less ReservesExternal Debt (2yrs maturity) - C/A Balance - Reserves

as % of GDP

bars = historical max/mindiamond = current

10% Liability"Cautionary Zone"

Significant External Funding Requirement

Reserves coverFunding Requirement


EM has dwindling vulnerabilities: but DM risk assets

are taking another leg higher and leaving EM behind

Source: FactSet, Goldman Sachs Global Investment Research

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Energy and Materialsas % of float cap

MSCI EM

MSCI World

38%

16%

22%

10%

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98

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106

108

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114

116

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DM Risk Index(equities, credit excess returns)

EM Risk Index(equities, local bonds, credit excess returns)

ISM, PMIsChina Credit Data

23

Disclosure Appendix

October 4, 2019

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure

Appendix, or go to www.gs.com/research/hedge.html.


Disclosure Appendix

Reg AC

I, Caesar Maasry, hereby certify that all of the views expressed in this report accurately reflect my personal views, which have not been influenced by considerations of the firm’s business or client relationships.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

Disclosures

Regulatory disclosures

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The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst’s area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director or advisor of any company in the analyst’s area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

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Disclosure Appendix

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General disclosuresThis research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete,

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Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in thisresearch.

We and our affiliates, officers, directors, and employees, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research, unless

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Disclosure Appendix

The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are

not an official view of Goldman Sachs.

Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report.

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