The recent rebound in emerging-market stocks isn’t over yet as investors move to assets that benefit from an improved outlook for the global economic recovery, according to Goldman Sachs Group Inc.

“We’re quite positive on EM stocks on a tactical basis,” said Caesar Maasry, a New York-based emerging-market strategist at the firm. “There has been an increasing preference for cyclical assets and we’ve also seen some U.S. dollar weakness. This short-term trend is expected to continue.”

The MSCI Emerging Markets Index has gained 30 per cent since reaching a four-year low in late March, as some economies started to reopen and high-frequency data came in better than forecast. While risks include a potential second wave of coronavirus infections and valuations that appear a bit stretched, Goldman still sees room for gains on a three-month basis.

Following Latin America’s underperformance earlier this year, Maasry says the region offers a combination of cyclical exposure and value. With Brazilian stocks up 46 per cent from their lows, Goldman now sees better relative value in Mexico. Banking stocks in both countries look attractive, amid prospects for lower interest rates.

“Unlike developed markets, where net interest margins are paramount, credit growth is the more important driver in EM and tends to accelerate when interest rates are very low,” he said.

Brazil’s Ibovespa index fell 36 per cent this year in dollar terms, the world’s second-worst performer, as the pandemic derailed the reform agenda and took a hit in the economy and fiscal accounts. Goldman says the index may rise to 100,000 in 12 months, a 8 per cent upside from current levels, while Mexico’s benchmark equities gauge may rise 12 per cent to 42,000.

Potential upside in the longer run is more limited as Brazil and other developing nations still have to deal with several structural problems that haven’t been solved yet, including a heavy debt burden and stagnant growth, Maasry said.

“On a longer term basis, perhaps in 12 months, fiscal challenges may come into focus and investors may realize that Brazil’s growth rate may not be as strong as they have hoped,” he said.

Goldman also sees “considerable upside” in emerging-market credit and finds high-yield sovereign credit in places including Egypt and Ukraine particularly attractive. According to the bank’s models, while emerging equities are pricing in a medium-term growth at 2.5 per cent and currencies price growth at 1.0 per cent, EM credit still prices a 1.0 per cent contraction, Maasry says.