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Flash: Macroeconomic tradeoffs driving EM differentiation – Goldman Sachs

FXstreet.com (Barcelona) - Emerging markets (EMs) differentiation is one of our top themes for 2013 and, so far this year.

Some equity markets have thrived (such as Turkey or Indonesia), while others have disappointed (such as Peru and Brazil). In turn, some currencies (the MXN and THB) have rallied, while others (the ZAR and CZK) have depreciated. Knowing that differentiation is occurring is less useful than knowing what is driving it. We look here at whether key macro factors help to explain the differentiation we have seen and what that tells us about whether it will continue.

According to the Economics Research Team at Goldman Sachs, “If our forecasts are correct, especially in terms of the pick-up in global growth for 2H2013 and 2014, the moves towards the positive side of the growth differential and a reduced inflation differential should give a tailwind to EM assets. But as capacity constraints tighten and EM output gaps close, further gains will become difficult. Also, remaining imbalances and other idiosyncratic challenges may hamper EM asset returns.”

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