Spotlight on Emerging Markets: Brazil, India and the Search for Yield

Insights on markets, industries and the global economy [Goldman Sachs] [BRIEFINGS] May 02, 2016 What's 'Top of Mind'? Brazil Brazil is reeling from a one-two punch. The economy is experiencing the worst contraction in recent history, while political uncertainty is reaching new highs ahead of a possible presidential impeachment trial. A range of policy measures are required to get the economy back on track, and when it comes to making fiscal reforms in particular, "it won't be easy, it won't be quick and it won't be popular," says Alberto Ramos, our head of Latin America Economics Research. In the latest release of Goldman Sachs Research's Top of Mind, editor Allison Nathan talks to Ramos about the needed reforms and the implications of inaction. [Read the interview] SHARE: [twitter] [facebook] [LinkedIn] [email] India: Small Reforms, Big Potential Despite a rough start to the year for markets and limited progress on headline reforms, India will remain one of the strongest growth stories in the region, says GS Research's Timothy Moe, chief Asia Pacific equity strategist. He views the current cyclical recovery -- coupled with improvements in the ease of doing business that have largely flown "beneath the radar" -- as positive signs for India's long-term growth and corporate earnings environment. [Watch the video] SHARE: [twitter] [facebook] [LinkedIn] [email] Briefly... on the Search for Yield in Emerging Markets After a difficult couple of years, emerging markets (EMs) may be getting some of their mojo back. Emerging market bonds have been rallying and money has been flowing into the asset class. Goldman Sachs Asset Management's (GSAM) Yacov Arnopolin, a portfolio manager for the Emerging Markets Debt team, explains why sentiment toward emerging markets has been turning. Many of the headwinds facing emerging markets -- oil prices and volatility around China's currency -- are waning. How will that affect flows into EMs? Yacov Arnopolin: The recent interest in EMs has been broad-based and has come from both institutional and retail investors. Despite the common belief that investors big and small have been abandoning EMs in droves since the "taper tantrum," we have witnessed steady inflows from pension funds, insurance companies and central banks -- all looking for yield pick-up and diversification. What are the macro factors behind the push and pull of investor flows into EMs? YA: We believe we are at the start of a transition from a shortage of risk-free assets to a shortage of high-quality risk assets. This is driven by a trifecta of macro factors. First, ongoing Fed dovishness has kept Treasury yields in check. Next, the negative interest-rate policies (NIRPs) in Europe and Japan have prompted the percentage of total developed government bonds with negative yields to surge. Finally, accommodation from the European Central Bank and specifically the launch of the corporate bond purchases should compress spreads on and limit the supply of fixed income paper. We think this creates a positive technical backdrop for EM bonds, untouched by official sector participation and with spreads still offering a material pick-up to developed market credit. Where in EMs are you seeing attractive opportunities? YA: Today, the case for investing in emerging markets is more nuanced given China's prolonged slowdown and the commodities downturn. But investors should not mistake lackluster growth for a threat to debt sustainability. While we remain cautious on economies most exposed to China's declining demand for industrial commodities, we are bullish on the Central American and Caribbean regions -- they import oil and rely on American tourism. Finally, several countries in South America are proving that politics could be a boon to asset prices, and not just a risk factor. The new administration in Argentina settled a long-standing dispute with holdouts from the 2001 default and issued the largest EM bond in history. And assets in Brazil have been rallying as markets look forward to a political transition. For more on the recent rebound in emerging markets, read GSAM's ["Emerging Recovery"], the latest in its Macro Insights series. National Small Business Week: What's Working This week is National Small Business Week in the US, highlighting the outsized impact of America's small businesses in creating jobs and driving economic growth. The latest progress report from the Goldman Sachs 10,000 Small Businesses program offers a potential blueprint for what's working when it comes to empowering American entrepreneurs. Thirty months after completing the program -- which offers a combination of education, opportunities to access capital and business support services -- graduates are reporting job creation and revenue growth rates that exceed the growth of US small businesses generally. See small business, big impact stories through [#makesmallbig] on Twitter. 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