Investors who wrongly called time on US economic supremacy during the financial crisis are set to pay a hefty price for betting too much on the developing world, according to a top Goldman Sachs strategist.
The US investment bank helped inspire a 20-fold surge in financial investment in China, India, Russia and Brazil over the past decade, its chief economist popularising the term BRICs in a 2001 research paper.
Sharmin Mossavar-Rahmani, in charge of shaping the portfolios of the bank’s rich private clients, has been arguing against that trend for four years, however, trying to persuade investors and colleagues they were safer sticking with the developed world.
The past six months has substantially vindicated that view.
China’s boom is finally wobbling under the weight of economic imbalances including an undervalued currency, and emerging stock markets are down 13% compared to an 11 percent rise in the US S&P 500 index over the same period.
“Many investors and market commentators have been too euphoric about China over the last decade and this euphoria is finally abating. Many just followed the herd into emerging markets and over-allocated to many of the key countries,” she says.
“It is easier to be part of the herd even if one is wrong, than stay apart from the herd and be right in the long run.”
The net gains for US stock markets may just be a taste of the reassertion of western dominance that may emerge in the next few years, Mossavar-Rahmani argues.
Structural advantages like abundant mineral wealth, positive demographics and, most importantly, inclusive, well-run political and economic institutions make the US the best bet going forward, she says.
“(Emerging market) investors are taking on so many risks compared with the US where the risk is largely cyclical rather than structural,” she says.
Many of the cyclical issues affecting the US such as high levels of debt, are also on their way to being resolved.
“One thing that normally puts investors off from increasing their US holdings is the long term debt profile, but we think the magnitude of the work done to address this has been underappreciated by investors,” she says.