Goldman Sachs: Sell Stocks with BRICs Exposure as China Slows

Updated on

Via Goldman Sachs presented without comment, besides this one line. Goldman invented the term BRICs now they are basically saying to sell the BRICs… interesting….

China Investment Share Of GDP BRICs

We are closing our recommendation to buy a basket of US stocks with the highest BRICs Sales exposure (Bloomberg ticker: <GSTHBRIC>) versus stocks with the most Domestic Sales (<GSTHAINT>) on lowered forecasts for China economic growth. The BRICs basket has returned 15.6% since we recommended the trade on Nov. 28, 2012, close to the 15.4% S&P 500 return but 190 bp less than the 17.5% for the Domestic Sales basket. We originally expected GSTHBRIC to outperform on increased confidence in the strength of EM economic growth relative to stocks with higher exposure to the US economy, where we expected a mid-year growth “hump” as a result of fiscal policy headwinds.


Last week our China economists lowered their 2013 and 2014 real GDP forecasts to 7.4% and 7.7%, respectively, from 7.8% and 8.4%. They also lowered CPI inflation forecasts to 2.4% and 2.6% on the basis of lower commodity costs and less domestic demand. For full details, see Asia in Focus, June 24, 2013.

Our economists estimate that the recent tightening in China financial conditions will cut growth by a cumulative 70 bp in 2013 and 2014. This tightening was driven by CNY appreciation and higher interbank market rates, which our economists view as a strong policy signal that credit growth will slow.

Soft cyclical signals were another driver of the downward revisions to China growth estimates. Sluggish consumption was the main reason for economic weakness in Q1, but since then exports and manufacturing investment have weakened. Bottom-up consensus estimates reflect concerns over the impact of slower EM growth on US companies with high emerging market exposure. The median company in our BRICs basket is expected to grow sales by 3% in 2013, half the 6% median growth expected for our Domestic Sales basket, despite twice the consensus 2013 GDP growth (6.3% for BRICs vs. 1.9% for the US). 2014 sales growth is expected to be 6% for the BRICs basket, slightly faster than the 5% median for the Domestic sales basket.

China the biggest of the BRICs is Weakening

We believe modestly slower economic growth in emerging markets, and China in particular, is unlikely to have a major effect on aggregate US corporate earnings. Roughly 5% of S&P 500 (.INX) sales are derived from EM, with 1% explicitly disclosed as coming from China. We continue to expect S&P 500 aggregate sales growth of 5% in both 2013 and 2014, with earnings growing 11% and 9%, respectively.

Leave a Comment