Goldman: Still The Best Combination Of Value And Carry Among EM HY

Goldman Sachs note that "EM currency longs, especially among the higher yielding group, have frustrated investors despite the weakening Dollar backdrop. Our general stance has been that the underperformance was understandable given the defensive rally in equity markets and the erosion in the real yield differential as EM central banks lowered rates to support their economies. Within the high-yield space, our preferred candidate has been the Mexican Peso—one of the few remaining places where the nominal and real carry is still sizeable, the monetary and fiscal policy mix still prudent, and the degree of undervaluation and therefore scope for retracement from the Covid lows still meaningful. The approval of a vaccine later in the fall, especially if it is co-incident with a friendlier shift in US policy towards global trade, could catalyse broader EM FX outperformance; but until then, short USD/MXN is one of the few places where you are still paid to wait. In addition, with foreign ownership of local debt in Mexico having declined as well, investor positioning is also less of an overhang as before. We maintain our short USD/MXN recommendation initiated in mid-July, but after a 4% potential gain, are tightening stops to the opening level."