Knee-jerk response to U.S. vote in emerging markets may be limited - Goldman Sachs

By Tom Arnold

LONDON (Reuters) - Lighter investor positioning in emerging markets heading into the U.S. Presidential election than before the 2016 vote, suggests 'knee-jerk' reactions to the outcome may be contained, Goldman Sachs said in a report.

Underperformance among those trades where investors were overweight, such as Mexico equities and Chinese and South Africa local bonds, also suggested that the risk of unwinding positions heading into election was not as significant as in 2016, the bank's analysts said.

"The memory of severe market volatility in the aftermath of the 2016 U.S. election is driving some caution across EM portfolio managers heading into next month's contest," the analysts wrote in the report.

In 2016, the MSCI's index for emerging market stocks and the JPMorgan EMBI Global Diversified index rallied into the election but both subsequently lost 7% in the week after President Donald Trump's victory.

The upcoming election presented a similar scenario, with polling pointing to a potential victory for Democrat Joe Biden in the presidential race.

But positioning was lighter this time, the bank noted.

In part due to the coronavirus shock, investors have sold $23 billion (17.75 billion pounds) of emerging market equities over the past six months, while fixed income inflows, excluding China, totalled $22 billion (17 billion pounds), but were focused in low-yielders like South Korea, according to the bank.

That's in contrast to 2016 when foreigners bought $26 billion (20 billion pounds) of emerging equities and $24 billion (18.52 billion pounds) of emerging fixed income during the six months leading up to the vote.

The analysts said they saw little cause for alarm in terms of positioning, with the emerging market trades most overweight across benchmarked funds not yet fully recovered.

(Editing by Kirsten Donovan)