Forex Flash: Downshift in EM equity performance illustrates contraction – Goldman Sachs

FXstreet.com (Barcelona) - The cyclical norms in EM sovereign credit and EM local yields are less instructive than those in FX and equity. Credit is performing better than the script for Slowdown would suggest, but this outperformance comes after a weak Expansion. Furthermore, yields declined, contrary to what we would typically expect based on the longer history, but more in line with their ‘modern’ behavior.

According to the Economics Research Team at Goldman Sachs, “The ‘downshift’ in equity performance makes some return patterns resemble more what is normally seen during the Contraction phase, rather than the Slowdown, which illustrate this by plotting a cross-section of returns seen during the current Slowdown phase against corresponding historical averages.”

However, these similarities cannot be taken too literally. While the pattern of out- and underperformers has been quite similar to what is normally seen in Contraction, the level of returns was considerably higher, as seen in the estimated intercepts in the above cross-sectional regressions.