Source: Wind

Since August, market volatility has intensified. US stocks and US bonds have fallen simultaneously, and the traditional “six shares, four bonds” investment rule has failed.Goldman SachsAnalysts said that after the uncertainty disappears, emerging market currencies are expected to become a “backing” for investment portfolios in the era of high bubbles and low interest rates

Investors face an era of high bubbles and low interest rates

Under the Federal Reserve's series of easing policies this year, US stocks have repeatedly reached new highs, yet traditional investors are facing two problems:

1. Further capital appreciation of stocks and bonds is limited by their current high prices. US stock technology companies have repeatedly reached new highs and are facing the risk of valuation bubbles; however, some companies with limited gains are constrained by the risk of the virus. Once the epidemic shows signs of recovery in the future market, these companies will also face a wave of sell-off.

2. The low interest rate policies of global central banks have driven global bond market yields to shrink. The yield on US 10-year treasury bonds has reached a record low this year. Moreover, fixed returns on high-rated corporate bonds are also shrinking.CitiCiti Private Bank (Citi Private Bank) estimates that even including high-yield and emerging markets, the current yield of the global bond market is 1%. Even for stocks, the blue-chip S&P 500 index has a 12-month tracking dividend yield of 1.86%, which has been hovering around 2% for the past decade.

Furthermore, the traditional investment concept of hedging the fall in the stock market through US debt has also gradually collapsed. In September, the decline in technology stocks led to a decline in US stocks, but the price of ten-year US Treasury bonds lacked a significant rebound. Generally, a fall in stock prices is accompanied by a sharp rise in the price of treasury bonds, reflecting their position in a broad portfolio. However, this year, US Treasury bonds have been in a range-bound state since the beginning of August, and the yield on ten-year treasury bonds hovers around 0.66%. This indicates that the ability to make large returns is limited and cannot help offset the portfolio pain caused by the collapse in risky assets.

Goldman Sachs suggests increasing bets on emerging market currencies

In this context, Goldman Sachs strategists say investors can increase their bets on emerging market currencies to withstand the era of low interest rates.

Specifically, the Goldman Sachs Research Report shows that although it may still be too early to invest in high-yield emerging markets while risk is still widespread and the US dollar is trending strongly, it is not too early to begin to systematically consider opportunities once the crisis subsides.

Kamakshya Trivedi, co-head of global foreign exchange research at Goldman Sachs, Caesar Maasry, head of cross-asset research in emerging markets, and a group of strategists believe that the Mexican peso is the most attractive among “high-cyclical betas and high-arbitrage bulls.” It was followed by the South African rand (ZAR) and the Russian ruble (RUB).

Currency arbitrage trading means investors borrow high-yield currencies to fund low-yield currency transactions to obtain the price difference between the two interest rates. Cyclical beta refers to the currency's sensitivity to broader economic cycles and market returns.

Goldman Sachs pointed out: The Mexican peso remains our first choice for emerging market currencies, even though its room for appreciation is already limited compared to other high-interest rate emerging market currencies. Even after the Mexican peso was sold off last week, the price of the US dollar against the Mexican peso is still down 10% from the level close to 19 before the pandemic.

“In the medium term, the macroeconomic fundamentals underpinning the exchange rate and the still high yield make the Mexican peso an attractive option.” Goldman Sachs analysts are also optimistic about the South African rand and the Russian ruble, believing that both currencies have a lot of room to operate. The former is “seriously undervalued,” while the latter has rebounded less in the sell-off so far this year.