Asset allocation: Goldman’s bullish bet on emerging market equities

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For over 20 years Goldman Sachs Asset Management has been running multi-asset strategies primarily for institutional clients. In the last few years these strategies have opened up to individual investors, says Shoqat Bunglawala, head of GSAM’s global portfolio solutions group for EMEA and Asia Pacific Ex-Japan.

Last August, the Global Absolute Return fund was added to the range, offering a strategy for investors looking “beyond concentration in equity risk or bonds as the primary risk mitigant” by blending in a range of alternative strategies.

Bunglawala says: “We started off on the total return side, so a risk profiled multi-asset fund, just over two years ago, then we supplemented it with a more absolute return approach, which has a much lower beta to market, a much higher degree of alternatives and dynamic asset allocation,”  Bunglawala says.

As of the end of October, within equities the £110.5m fund takes a 38 per cent long position and 47 per cent in fixed income. Its short positions are 21 per cent and 43 per cent respectively.

Bunglawala says important contributors to performance in the fund’s first year have been high yield, real estate and small caps in the traditional space. In the alternatives space its volatility selling strategy on equity indices has been beneficial for the fund.

Winds of change

The fund is driven by the premise that traditional exposures like equity and bond rates are not going to behave like they have done over the last six or seven years.

“They’ve essentially both done very well,”  Bunglawala says. “We think that the forward outlook on both is going to change.”

“The critical point for how that translates to asset allocation is that bonds feel like the mis-priced asset,” Bunglawala says. “While equities on a relative basis to bonds look attractive, we think that valuation gap will largely be unwound through an increase in rates.”

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Speaking before the US election, he describes the US Federal Reserve being “behind the curve” when it comes to raising rates. Even though the market is pricing in a December rate rise, Bunglawala believes the probability priced in for 2017 is understated.

“We’d anticipate two further hikes through 2017, so ahead of market expectations.”

The team’s view on the Fed means they are positive on the dollar relative to the euro, sterling and the yen. “With sterling in particular we still think there could be continued downside pressure given the uncertain environment in the UK, largely given the uncertain environment in the negotiations with Europe.”

However, for the US, UK, Europe and China, Bunglawala describes the outlook as “moderate, but reasonable” and expects that to continue for the “next couple of years”.

On Brexit, Bunglawala admits economic growth has been a “little more stable” than the team had been anticipating. “But we don’t think that’s the end of the story here yet. There’s still a lot of uncertainty given there’s a lot of room to tread as it relates to the negotiations and we therefore expect economic growth will be impacted in the UK.”

Sterling depreciation alone will impact economic growth, he says.

Emerging market movers

Being long Japanese equities – a stance driven by the country’s new growth agenda, its 2 per cent inflation target and a significant loosening in monetary policy – has been one detractor for performance in the fund’s first year.

Bunglawala argues the situation is improving however.

“Japanese equities have actually more recently done reasonably well, but if you look at the picture over the course of the year, Japan has underperformed the US market and therefore whilst the constructive view about being positive equity beta has been additive it’s been offset by that country selection.”

On a relative basis, Bunglawala says he favours emerging markets over developed markets, particularly Asia and specifically South Asia.

“Where we are overweight in equities we are primarily expressing that through emerging markets,” he says.

Bunglawala is particularly positive on India, arguing it has a strong economic growth outlook and is undergoing significant reform. “A government that’s clearly supporting further reform and infrastructure spending has been additive.”

Furthermore as a net oil importer it benefits from the stabilisation of the price of oil “significantly lower than it had been historically”.

Three factors inform Bunglawala’s view on emerging markets as a whole. He lists them in order:

“The first is that valuations have adjusted following the significant sell off from 2011 to 2015. Secondly we think the macro imbalances have improved as it relates to the current account deficits and debt financing for a number of these emerging markets.

“Thirdly, those sectors and currencies that are particularly hit by their dependence on commodity exporting have become more attractive given the outlook for commodities themselves have stabilised.”

But the fund is still only “selectively positive”. It is short Malaysia, for example, on the basis that it will not benefit as much from the trends Bunglawala notes.

On commodities, Bunglawala says the fund adopts positions “to the extent we see market dislocations or significant moves away from equilibrium”, but does not have structural weightings.

He argues the upside for oil is capped, regardless of whether Opec agrees to limit supply, due to the ability of shale gas to generate profits at a much lower level than originally assumed.

“We’d expect that the energy markets will still continue to be range bound between $35 and $55 a barrel with a view of that potentially moving up to $60 by the end of next year,” he says.