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Emerging Markets: Risks and Opportunities

Emerging markets span a wide range of risks as well as opportunities. In this video conversation with David Solomon, chairman and CEO of Goldman Sachs, PIMCO CEO Manny Roman discusses the key factors to watch in assessing EM investments.
For more on PIMCO’s outlook for emerging markets and the global economy more broadly, please read our latest Cyclical Outlook.

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Text on screen: An excerpt from Talks at GS on September 14, 2018

David Solomon, CEO Goldman Sachs: How big do you think the risks are in emerging markets right now? When I think about contagions, when I worry, I get asked all the time, what are you worried about? I'm worried about some of these [unintelligible] markets. I'm worried in Italy about an auction not clearing, them raising rates, the fact that they raise rates to try to attract capital scares more, and you get into a vicious negative spiral. How worried are you about the emerging markets and some of the fracturing that's going on in some of these markets or some of these weaker peripheral markets?

Emmanuel Roman, CEO PIMCO: How big do you think the risks are in emerging markets right now? When I think about contagions, when I worry, I get asked all the time, what are you worried about? I'm worried about some of these [unintelligible] markets. I'm worried in Italy about an auction not clearing, them raising rates, the fact that they raise rates to try to attract capital scares more, and you get into a vicious negative spiral. How worried are you about the emerging markets and some of the fracturing that's going on in some of these markets or some of these weaker peripheral markets?

But if you think of companies who have been able to compete against the FANG, China is the only country [unintelligible]

David: China is the only place in the world. Between the US and China, if you really think about tech market cap, 90 some percent of tech market cap is from the US and China. Really extraordinary. We touched on — we started to touch because we went down emerging markets, but just the economy broadly. You guys are big macro thinkers.

Emmanuel: I think the [unintelligible]

David: Where is the world, where is the economy, what macro factors you feel good about, what do you feel bad about?

Emmanuel: I think the world is okay. I think the world is gonna grow at 2.9 percent. I think we're gonna have growth next year. Europe feels okay. China feels good. And what's the risk? And the risk is that somehow we got something wrong. And we're talking about this, either there's more inflation than we think there is, or either unemployment goes down really dramatically, and the labor markets become very, very tight, which result in inflation. And then Powell needs to raise rates quickly. And then the market is caught by surprise. And then the equity market correct 15 percent. And then all of a sudden economic activity goes down because.

David: Chance of that happening in the next 12 months as you guys think about it?

Emmanuel: 15 percent, 20 percent.

David: Chance of that happening in the next two years?

Emmanuel: 55.

David: 55 percent. Okay. By the way, that's not a guess. That's actually — I'm sure you've got models all over —

Emmanuel: Yeah, we have models. So we have actually two different type of models. We have econometric model and we have machine learning model. And we sort of compare them and try to predict the unpredictable.

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