Goldman Sachs prefers EMs to DMs in 2019 Outlook: Goldman Sachs is heading into 2019 with a preference for emerging market equities,according to its 2019 Investment Outlook (pdf). Goldman’s outlook recognized that the underperformance of EM assets in 2018 was due to “lower-than-expected growth in EM markets.” GS sees the outlook for EM improving in 2019, noting that emerging markets are in the early phases of a longer-term expansion.

EM equities are “trading at an attractive 25% discount to DM equities while offering potentially higher expected earnings growth.” Emerging economies are in the “early stages of recovery with room to run” — at the same time as US growth will likely remain moderate.

Goldman also likes EM currencies, saying they’re undervalued by as much as 23%.

Goldman sees China as the biggest EM risk factor: China is the “biggest risk to our view in both 2019 and over the medium- to long-term,” singling out “vast credit creation in recent years,” which it says will present risks as “growth transitions to a lower trend level and rotates from investment- to consumption-led.” With trade wars looming, China’s 6.9% growth forecast (already its lowest since the ‘90s) looks iffy. Potential risks are considerable in 2019 and will likely increase by years end.

Geopolitical risk will remain high and likely be key driver of drawdowns in the markets in 2019. With the bar for next year now set a lot lower when it comes to “macro expectations and asset prices” in comparison to 2018, that means “positive surprises” in 2019 could lift asset prices.