Episode summary
Emerging Markets: Stirred, But Not Yet Shaken
Exchanges (Goldman Sachs)
· · Guests: Kamakshya Trivedi
Summary
Kamakshya Trivedi argues that markets have mostly priced an inflation shock from the Iran conflict, not yet a full growth shock. He says higher energy prices have pushed rates higher, reduced expected cuts in the US and UK, and hurt common hedges such as duration, gold and the Swiss franc. In his view, the bigger risk still ahead is that the conflict lasts long enough to create physical shortages and broader growth damage.
He says the dollar has strengthened because the shock is global and the US is on the favorable side of the terms-of-trade divide as an energy importer. For emerging markets, he says the conflict has interrupted strong momentum, especially in places that had been outperforming, but it has not fundamentally changed the long-term story if the conflict remains short lived.
Trivedi expects 10 to 12 percent upside in emerging market equities, driven mainly by earnings growth, with Korea as the clearest example because of AI-related chip demand. He also sees support from a still-overvalued dollar that could weaken over time, resilient EM macro fundamentals, and persistent underweight positioning among global allocators.
Key takeaways
- Trivedi says markets have priced an inflation shock from higher energy prices, but not yet a growth shock.
- He says long duration, gold and the Swiss franc have not worked as portfolio hedges in this conflict.
- He expects 10 to 12 percent upside in emerging market equities, mostly from earnings growth.
- He says Korea, Taiwan and China remain attractive because AI demand supports semiconductor pricing power.
- He thinks Brazil and South Africa could recover if the conflict deescalates and commodity exporters regain favor.
- He says a weaker dollar over time, healthier EM macro fundamentals and underweight allocations should support the asset class.
Notable quotes
“the market is pricing in a higher inflation shock in response to the spike in energy prices that you've seen as a result of the conflict”
“it's been quite a painful period for portfolios, in part because those hedges haven't worked”
“what you're actually seeing is that that second axis of differentiation, terms of trade, you know, who is an energy exporter and who is an energy importer, that fundamental axis has become a bigger differentiator”
“we're expecting something like 10 to 12 percent upside from current levels”
“It's a less racy asset class. It's a more reliable asset class”
How the episode opens
It's been a wild year for markets with risky assets performing strongly through February, but reversing much of their gains as oil prices spiked in response to the Iran conflict. So, where do markets go from here? I'm Allison Nathan and this is Goldman Sachs Exchanges.
Joining me here in London is Kamakshya Trivedi, chief foreign exchange and emerging market strategist in Goldman Sachs Research. Kamakshya, welcome back to the program. Thank you, Allison, it's a pleasure to be back.
So, obviously, it's a very uncertain time for markets. So, we have a lot to talk about. First, just get us up to speed on how markets are digesting the developments in the Middle East.
It is a very uncertain time. And lots going on. So, I would make three high level observations.
First, I think the market is pricing in a higher inflation shock in response to the spike in energy prices that you've seen as a result of the conflict. You see that in the way rates curves have moved up. Generally, places that were pricing cuts, central banks that were priced to cut rates.
You've seen those cuts come out. Places that were priced to be on hold, you've seen more hikes priced into those places. So, the UK, the US where we were expecting to see cuts, the market is pricing fewer cuts there.
It's pricing higher inflation overall. I think the second thing that is quite striking through these last couple of weeks is that things that people had on as hedges for portfolios has, broadly speaking, not worked. So, long duration, people being long interest rates, I think that hasn't really performed.
People got comfortable with long gold positions. Those haven't really performed. The Swiss franc was another popular geopolitical hedge.
That didn't really perform.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- emerging markets
- iran conflict
- market reaction
- risk sentiment
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Emerging Markets: Stirred, But Not Yet Shaken” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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