Are The BRICs Broken? Goldman And Roubini Disagree On China
While most of the time, it seems, investing in Emerging (or Growth) market countries is entirely focused on just that - the growth - with little thought given to the lower probability but high impact event of a growth shock. Goldman uses a variety of economic and corporate factors to compile a Growth Vulnerability Score including excess credit growth, high levels of short-term and/or external debt, and current account deficits. Comparing growth expectations to this growth shock score indicates the BRICs are now in very different places from a valuation perspective. Brazil remains 'fair' while India looks notably 'expensive' leaving China and Russia 'cheap'. It seems, in Goldman's opinion that markets are discounting large growth risks too much for China and Russia (and not enough for India). Finally, for all the Europeans, Turkey is richest of all, with a significant growth shock potential that is notably underpriced. Goldman's China-is-cheap perspective disagrees with Nouriel Roubini's well-below-consensus view of an initially soft landing leading to a hard landing for China as 2013 approaches as he notes the pain that commodity exporters feel in 2012 is only a taste of the bleeding yet to come in 2013.
Goldman Sachs: Growth Markets Strategy: The vulnerability of growth
Assessing the vulnerability of growth
We assess the potential for growth shocks in EM by using a variety of economic and listed corporate data to compile a growth vulnerability score (GVS) for each country on an annual basis. Our model tests well on its ability to predict severe and medium growth shocks.
Learning from historical GM crises
We complement our analysis by looking at the underlying factors during ten EM growth crises, and find a variety of combinations which may have driven the shocks. We also show that countries like China, India, and Taiwan, which did not experience growth shocks in the 1990s, tended to exhibit low GVS levels.
Current GMs: Turkey vulnerable; most look healthy
Using our framework to assess current GMs, we show Turkey as particularly vulnerable to growth shocks. India and Brazil have moderately high scores; Mexico, Russia, China, and Indonesia look least vulnerable. Indonesia, in particular, appears to have systematically lowered its growth vulnerability over the past decade.
Growth anomalies: Overly optimistic in Turkey and India
When we compare equity valuations to consensus forward GDP estimates and GVS levels, valuations in Turkey and India appear to discount few growth risks, while at the other extreme, valuations in China and Russia seem to discount large growth risks despite our assessment that growth is less vulnerable than other GM countries.
Source: Goldman Sachs
Which should be compared to RGE's less sanguine view of China specifically...
Macro Outlook: Soft on the Outside, Hard in the Middle—China’s Current and Future Slowdown
- RGE’s 2012 growth forecast assumes a significant slowdown in property and infrastructure investment, but relative strength in consumption. A policy response in Q2 is likely to put a floor under the property market correction, but elevated inventory levels of finished properties and construction inputs will repress investment and commodity demand into 2013.
- We expect a sharper slowdown to begin around H2 2013, by which time local government debts will need to be systemically restructured, sparking a more severe correction in fixed-asset investment.
- Our medium-term forecast of 4-6% (2014-16) is well below consensus expectations. We expect China to grow below potential as the leveraging of the central government cannot fully offset the required deleveraging of local governments, heavy industrial producers and property developers. Private consumption is unlikely to accelerate as financial repression is maintained or worsened to ease the deleveraging process and as household balance sheets are impacted by a deflation of the property bubble in high-end urban markets.
The Current Slowdown: The recent string of weak data out of China has surprised consensus and conformed to our expectations for a sharp deceleration of growth in Q1. This has primarily been led by a slowdown in the property sector—residential sales fell 25% y/y by value in the first two months of 2011—which is now impacting steel, cement and other heavy industries linked to the property market, pulling down industrial production (IP) growth and profit margins. Now, consensus has caught up to our forecast and expects a policy response in Q2 in the form of interest rate cuts and some easing at the margins of the property market restrictions. However, unlike consensus, we do not think this will generate a sharp rebound in growth. Unsold inventories remain high for property developers, industrial investment will be limited by falling profit margins and the government’s emphasis will remain on ensuring sufficient credit for existing infrastructure projects, rather than approving new capacity. We expect a gradual recovery that will culminate in above-trend growth only in Q4 on a q/q seasonally adjusted basis. We foresee a more moderate slowdown in private consumption, as wages continue to rise and inflation eases, while net exports are likely to be neutral for growth. China has built up significant stockpiles of iron ore, copper and other industrial inputs that will likely be drawn down in H2, which will contribute to a widening of the trade surplus. Our 7.8% growth forecast for 2012 is far from a hard landing, though it may feel like one to commodity exporters. As the trade surplus widens and worries about a hard landing abate, the resulting jump in capital inflows will spark a return to near-trend reserve accumulation to limit the impact on RMB.
The Coming, Sharper Slowdown: The current situation should not be confused with our medium-term forecast for a significant slowdown in growth and an elevated risk of a hard landing. China has the capacity to “kick the can down the road” this year and maintain its unbalanced growth model, but it will not have this luxury much beyond 2013. The pain that commodity exporters feel in 2012 is only a taste of the bleeding yet to come after 2013. On the capital account, China’s outward FDI to emerging Asia, Africa and Latin America is likely to slow sharply as the policy banks are redirected to combat domestic problems. A reduction of Chinese capital outflows and an increase in global risk aversion is also likely to spark funding difficulties for EMs that run large current account deficits, though a flight to safety will spare the world’s largest debtor most of the pain. Private outflows should be offset by a wider current account surplus and official inflows as foreign assets are sold to cover domestic liabilities, resulting in balanced pressure on RMB.
So Goldman is Bullish On China (thanks to their model saying growth vulnerability is over-priced) while Roubini's fundamentals point to an initial soft landing transitioning to hard landing in 2013...hhmm - who to believe?