Goldman says emerging markets' woes over

A stronger dollar and slower growth in China might prompt policy makers to allow the currency to fall with a spillover effect

After three years of disappointment, emerging markets (EMs) are about to turn the corner, Goldman Sachs Group Inc predicts.

As growth picks up and weaker currencies help alleviate economic imbalances, "2016 could be the year EM assets put in a bottom and start to find their feet," strategists led by Kamakshya Trivedi wrote in a note Thursday. "There is the prospect of improved growth and better returns, even if it is not a rerun of the roaring 2000s."

The New York-based firm is joining a handful of investors who have become more upbeat about developing economies after their currencies fell to record lows and stocks trailed developed-market peers by 51 percentage points over the past three years. Franklin Templeton hassaid the selloff has opened up buying opportunities not seen for decades.

Goldman Sachs predicted that developing countries will grow 4.9 per cent next year, from an estimated 4.4 per cent in 2015, marking the first acceleration since 2010. While it is still below the long-term trend, the improvement can only help boost investor confidence given the current "widespread bearishness," the analysts wrote.

Even though countries such as Colombia, South Africa, Turkey and Malaysia still need to tackle their current account imbalances, others including Russia, India and Poland have improved enough for their assets to rally, the report said. On the valuation front, emerging-market currencies are no longer "expensive."

"We would part ways with the extreme pessimism that we sometimes encounter about the long-term prospects for EM assets," the analysts said.

The MSCI Emerging Markets Index rose 0.1 per cent at 11:03 am in Hong Kong, extending its weekly advance to two per cent.

Goldman Sachs said the biggest risk is a "significant depreciation" of the yuan. A stronger dollar and slower growth in China may prompt policy makers to allow the currency to fall with a spillover effect rippling through emerging markets, the report said.

"In our view, the fallout from such a shift is the primary risk," the analysts said.