The blue line in Figure 2 shows the Goldman Sachs Financial Conditions Index (FCI) вЂ“ a move up in the index means financial conditions are tightening, and a move down signals easing. Since we published our last report, financial conditions have tightened as we expected. This could require many of them to return to running current account surpluses to offset capital account outflows, which in turn would require weaker real exchange rates to achieve such surpluses. We argued that this would lead to a slowdown, and even outflows, from the capital accounts of the EM countries. In February, we said that we expected EM currencies to weaken as a result of the tightening of monetary conditions which had already started in the US and that we expected to see in Europe. Source: Bloomberg and GLG database as of April 30, 2018. Current Account / GDP and valuations for EM countries / currencies in local bond index The question on many investorsвЂ™ minds is whether this is a buying opportunity or whether there is room for further weakness in EM. The FX component of the local bond index has depreciated by -8.1% since its peak in late January through the end of May, while the EM hard currency index (JPM EMBIG) has seen spreads widen by +47bp year-to-date through May. Since then, EM currencies have weakened versus the US Dollar and EM credit spreads have widened. We showed that the current account balances for countries comprising the EM local bond index (JPM GBI-EM GD - shown in the yellow line of Figure 1) had plateaued over the last two years (and in some countries have started to roll over) in spite of what appeared to be relatively cheap valuation of EM currencies (dark blue line line in Figure 1).

In our write-up back in February titled вЂњ Brace for ImpactвЂќ, we argued against the market consensus view that EM fundamentals and debt instruments remained attractive. In this note, we make the argument as to why we believe there will be further pain in our markets and explain the three key reasons for this view, namely: valuations, fundamentals, and positioning.

With Emerging Markets debt in the depth of a selloff not seen in quite some time, investors are left pondering whether this is a buying opportunity or if there is more room to go. We believe there will be further pain in our markets for 3 key reasons: valuations, fundamentals, and positioning.

Exceeded 400 fx assets