Goldman Sachs shuns the BRICs for Wall Street

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Niccolo and Donkey
Goldman Sachs shuns the BRICs for Wall Street

Telegraph UK

Ambrose Evans-Pritchard

January 18, 2011

Goldman Sachs has issued a short-term alert on China and India as inflation rears its ugly head, advising clients to rotate into Wall Street and Old World bourses as a safer bet over coming months.


"We're not as tactically positive on the BRICs as we have been," said Tim Moe, the bank's chief Asia-Pacific strategist, referring to the quartet of Brazil, Russia, India, and China.

"To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight. Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather," he said, speaking at a Goldman conference in London.

The cooling ardour for China is significant shift for the bank that invented the term BRICs and has been the cheerleader of the emerging market story over the past decade.

India is an even bigger worry, with yawning twin deficits, and overheating visible on all fronts. The nation's central bank warned this week of "surging inflation".

"India's current account deficit is running at a record pace of 4.1pc of GDP and it is 100pc funded by short-term portfolio flows, which cannot be relied on indefinitely," said Mr Moe, describing Mumbai's bourse as "crowded".

Goldman insists that the longer-term super-boom remains healthy in both the BRICs and a broader group of countries, or "N-11", led by South Korea, Indonesia, the Philippines, Turkey and Egypt.

Pension funds and insurers in the rich countries have invested just 6.5pc of their $60 trillion (£38 trillion) of combined wealth in new markets, leaving them vastly misaligned against the geography of world growth. "We are only in the first innings of an undeniable structural story over the next two decades," said Mr Moe.

Japan's state-run GPIF, the world's biggest pension fund with $1.4 trillion in assets, is only now acquiring a change in its mandate allowing it to venture outside the mature economies.

First, however, China must extricate itself from a credit boom. Mr Moe said the outcome is hard to judge since Beijing is resorting to opaque instruments to fight inflation – 5.1pc and rising – rather than relying on transparent instruments of interest rate rises and currency appreciation.

Goldman expects China to rebound strongly in the second half of the year, distancing itself from the ultra-bearish views of those such as hedge fund star Jim Chanos betting that Beijing will prove unable to engineer a soft landing from its property bubble.

The surprise for 2011 will be a torrid recovery in the US, with growth of 3.4pc to 3.8pc, as the country confounds critics and averts a post-bubble "Lost Decade". Surging earnings will push the S&P 500 index of US stocks to 1500 by the end of the year.

Even Japan will outshine China, pulling out of its deflation trap, with earnings growth of 23pc this year and 22pc in 2012. Kathy Matsui, Goldman's Tokyo strategist, said Japanese equities may be the best way to play the Pacific growth story since the average price-to-book ratio is 1.0, compared to 1.9 for China and the rest of emerging Asia.

She said Japanese companies are sitting on a "Mount Fuji" of cash reserves worth $867bn to be unleashed on share buy-backs, dividends and a takeover blitz once the deflation danger recedes.

Jeff Currie, Goldman's commodity guru, said global equities will beat resources for the next few months. Gold may yet push yet higher to $1,650 an ounce before peaking but vertigo sets in at these giddy levels. "Gold is pricing sovereign default risk but we see the macro-environment on a much more solid footing," he said.

Mr Currie told clients to remain "long gold" until the US Federal Reserve winds down quantitative easing and prepares for a tightening cycle. There is a near-perfect correlation over time between negative real interest rates and rising gold prices.

With real rates near minus 1pc in Europe, minus 2pc in the US and minus 3pc in the UK, a wash of global liquidity is fuelling the bullion boom – along with purchases by the central banks of China, India, and Russia – but watch out when the worm turns.

The moment that OECD central banks start to raise rates in earnest could switch the process into rapid reverse. Mr Currie has compiled a chart of real gold prices based of Bank of England records dating back to 1260, when Pope Alexander IV was cranking up the Inquisition and Henry III was trying to reverse the Magna Carta in England.

It shows that prices are the highest they have been at any time for the last 440 years, other than a brief episode in the early 1720s, and the parabolic spike of 1980, which collapsed abruptly.

The "Soviet bloc" of CCCP – crude, copper, cotton, and platinum – offers a more enticing balance of risk and reward. "All of these commodities are supply-constrained. The world can't produce enough of them, and nor can China." Mr Currie said.