Goldman Sachs shuns ‘naked long’ bets in EMs as growth seen sputtering

Maasry recommends relative value: Buy the Brazilian real by shorting the Australian dollar, for example, or fund a long position in the Mexican peso with euros

Goldman Sachs Group Inc. says sputtering global growth means it’s too late to go “naked long” emerging markets, instead bet on short-term carry trades and assets in nations that can afford fiscal stimulus.

“We are getting late cycle and it is very hard for emerging markets to outperform in this scenario,” Caesar Maasry, a New York-based emerging-market strategist at the firm, told journalists in Sao Paulo.

Maasry recommends relative value: Buy the Brazilian real by shorting the Australian dollar, for example, or fund a long position in the Mexican peso with euros and bet on the South African rand by shorting the Chilean peso. He’s avoiding shorting the US dollar on concern it may strengthen.

Growth will probably keep decelerating in both developed and emerging economies and monetary easing won’t do much to change that trend, he said. Reversing course would require a big fiscal stimulus package from China or a US push for infrastructure spending. For now, those events are just upside tail risks.

Nations with room to lift spending include Indonesia and South Korea, he said, pointing to stocks in the latter as the cheapest among developing nations and a better play than the broad MSCI Emerging Markets index. Overall valuations aren’t cheap relative to developed markets, he said.

Moving forward with a reform agenda also offers an upside.

That’s the case in Brazil, where lawmakers are progressing in the approval of a pension overhaul that’s expected to generate savings of about 900 billion reais ($240.8 billion) over the next 10 years.

That said, money will only truly surge back to emerging markets if the external backdrop is supportive, according to Maasry. That means improving global trading flows, rising commodity prices and favorable financial conditions.

“It is actually not the domestic fundamentals that are the most important factor for foreign inflows,” he said. “It is the appetite for emerging-market risk.”