Emerging market (EM) currencies are coming back from four years of turbulence, bringing some of the best opportunities in today’s markets, according to Goldman Sachs Asset Management (GSAM) global fixed income outlook. GSAM sees “a rare combination of value and improving fundamentals in parts of the developing world, and currencies generally remain undervalued relative to debt … we believe [EMs] may be less exposed than most developed markets to the epicenters of today’s political risks … exogenous factors have since receded, leaving a substantial premium in emerging markets, especially in a developed market environment of negative inflation-adjusted yields.” GSAM believes central and eastern European markets have the advantages of strong BoP and trade linkages to Europe, but not “enmeshed in the euro’s problems.” The main risks within the developing world, they say, stem from China, and are positioning for weakness in Asian currencies most exposed to market- or economic turmoil in China, such as the Taiwan, Singapore and Hong Kong.

Goldman Sachs also believes positive economic momentum will continue to support EM earnings growth and equities. “EM equities have already rallied on the commodity price recovery and increasing sentiment that the protectionist rhetoric from Trump on trade will not be converted into actual policy. Equity valuations have been rising but are still attractive versus developed markets; the MSCI EM index is trading at a 12-month forward P/E of 12.3x, a 25% discount to the MSCI World index. Despite the fundamental earnings recovery, EM remains subject to several external risks including rising interest rates and increasing geopolitical tensions.”