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Flash: Large degree of differentiation in EM assets – Goldman Sachs

Emerging markets (EMs) differentiation is one of our Top Ten Market Themes for 2013 and, so far this year, EM performance has differed markedly across major asset classes, especially equities and FX.

Knowing that differentiation is occurring is less useful than knowing what is driving it. We look at whether key macro factors help to explain the differentiation we have seen and what that tells us about whether it will continue.

Our approach locates countries on a map of basic macro trade-offs, defined by the growth and inflation differentials and the output gap. These are powerful metrics that help determine the stance of monetary policy and, in turn, asset market performance. According to the Economics Research Team at Goldman Sachs, “We find that the most favorable environment for equities has been a positive output gap and a negative inflation differential. In turn, currencies have depreciated the most in countries with negative output gaps and negative inflation differentials.”

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