Are The BRICs Broken? Goldman And Roubini Disagree On China

Tyler Durden's picture

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?

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Careless Whisper's picture

The Careless Whisper Afternoon News Update & Threadjacking

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DutchR's picture

Dmn, what a flashback, Wilson Phillips!!!

Still have the vinyl somewhere hahaha

WhiteNight123129's picture

"though a flight to safety will spare the world’s largest debtor most of the pain."


Roubini is a maniac, while I would agree that China would feel deep pain, but a flight to "safety" of the USD in a China crunch context would be ubber delationary for the US. In that case Hugh Hendry is correct in my opinion, China hard lending is uber deflationary and would lead to massive printing.





Careless Whisper's picture

Goldman And Roubini Disagree On China

But can they at least agree on Asian Massage Girls from GoldmanSachs 16% owned online escort ad business?




ACP's picture

The whole massage/hooker thing is overblown, pun intended. What if it was just a part of Goldman's employee wellness plan?

Schmuck Raker's picture

The take away for me...

Buy Mexico and Indonesia. Boring = Good.

SheepDog-One's picture

One of the quietest markets days I can remember in a long time, eerie feelin.

fonzannoon's picture

I fell like this has been every day for 6 months minus a few hours two days ago. Ben managed to knock oil all the way down to 103 bucks and gold all the way down to 1630 with his big announcement. He did keep a lid on yields I will give him that.

SheepDog-One's picture

Sure its all BS just to keep things looking normal while the real plan goes on behind the scenes. DOW 13,000, only 1,000 points below all time high yet everyone is yelping for QE like wounded starving dogs....we get the 'No QE' announcement which results in little damage to stocks, less then 200 point loss yet PM's of course swan dive, and Europe is wildly unraveling but for some reason now none of that is news worthy. Bah...its all just BS to keep the sheeple placated!

Piranhanoia's picture

Goldman's Sack;   We feel the only good growth potential resides in nations with communist or totalitarian governments.  We also like those with ongoing drug wars where the population is fearful.  We think countries that once had totalitarian control will be returning to them soon. Bullish. (as we short them waiting for a coup, hahaha)

 This is where we will tell you we are going to invest your money even if we have the legal responsibiity to lie to you and anyone else to maximize our,   your profits.   From Goldman's Sack,  your personal prophet. 

Dad Was Right's picture

I guess it’s not just me.  Something doesn’t feel right today. There’s something in the air and I don’t mean the radiation California is importing from the Japanese.  Euro has been falling hard the last few days. Poor auctions in Europe.  New clashes in Greece. The Swiss had to defend the 1.20 level today (but with much less vigor than one would expect).  Japan seems finally to be inching toward the edge. Irrationally disconnected US markets seem to showing some withdrawal symptoms.  NFP coming out in the morning. Secret banker meetings… And lots more…


Nothing really new I know, but it all feels kinda twitchy. Maybe it’s the fact that so many banks and markets are closed or will be closed today and tomorrow. Seems an ideal time for some major bad news or sovereign moves…



On a different note…


We lost a great rock guitarist a few weeks ago.  I was a big fan of Ronnie Montrose back in the ‘70s. I still am. I was lucky enough to see him play in a club last year. (I took my 19 year old son. He saw a side of his father he had never seen before that night!)


Never really gave much thought to the lyrics in some of his songs back then. I didn’t even know what a reserve note was - but they were singing about it in 1974. (Never would have thought my dad and Ronnie Montrose had anything in common. Maybe Ronnie actually listened to his father…)


Paper Money


I play the game of a rich boy,
I buy everything I can.
My bankroll is a foot thick,
I'm a wealthy man.
A million dollar reserve note is right there in my hand
And I can't stand to's all that I've got.
Take away all my silver
Take away all my gold
And hand me a stack of paper
Paper money don't hold. Paper money don't hold.

Well, you act as though you don't remember
The way it all used to be.
Now one man, he locks up the money
Another man holds the key.
My car cost me fifteen grand,
Some say I got a deal.
Melt it down, I've got a thousand pounds of junk
And ten dollars worth of steel.


And for those that might remember, that is Sammy Hagar on the vocals.



Better audio quality – no video.



RIP Ronnie Montrose

November 29, 1947 – March 3, 2012



SheepDog-One's picture

I think the NFP will indicate the course theyve set...a big beat like some are betting on and the QE really is off, then theres the chance its a big downside surprise which means Bens 'crisis' hes flapping his gums about is the prefered course and we get QE in whatever form and $6 gas. Then the 'in-line' result would be theyre still there on spin cycle, extending and pretending, and still wondering wheres retail to buy the printing off their hands. 

We'll see in a few hours.

boogerbently's picture


Who to trust LEAST.

An idiot or a liar.

nope-1004's picture

LOL, exactly what I was thinking.  Roubini has been so wrong on the economy over the last 4 years that whenever I see him interviewed, I promptly switch or turn it off.  He's out of touch.


DoChenRollingBearing's picture

I can only comment on Peru.  That country has been, and still is for the moment, on a TEAR!  I do feel that a downcycle will get Peru good and hard if China has a hard landing.  

And anything bad happens here in the USA and Europe (very likley IMO), that means that even Peru will get beaten like a whipped dog.

Village Smithy's picture

OT: Is it just my limited knowledge of the markets or did we just witness a large PPT intervention with volume spiking but price dropping only slightly at the close? Especially the SPY.

rosiescenario's picture

" 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 201..."


The news from Australia this past week appears to confirm slowing demand from China.

Lux Fiat's picture

Looks like Norway didn't take enough inventory off of GS's hands.  []

Re China, given Wen Jiabao's recent rumblings on the big banks making to much money in China and not lending enough to small and medium-sized businesses, could be that the lending/funding situation ain't pretty. 

denny69's picture

The only notable aspect to pay attention to when referring to Goldman's observations, suggestions, etc. is how much they stand to earn from their sometimes confusing advice. Goldman always takes the path to the most money, always, whether it be a legal, illegal, secret or publically proclaimed path to the riches. The time to pay attention is when they engage their machinery. Everything prior to this is bunk.

Canucklehead's picture

...Turkey is richest of all, with a significant growth shock potential that is notably underpriced...

I guess that statement answers the question about who is the financial advisor to Turkey who recommended they have their citizens exchange their gold for certificates.

RiverRoad's picture

And bleed we will when all this election farce crap is over; the piper will be paid.

pocomotion's picture

BRICS with Japan, Iran and 144 other countries are breaking away from the DOLLAR gamers.

I must ask everyone --Who is really 'BROKEN' here?

silverdragon's picture

China has two feet on the brakes of the property market and they can remove them anytime they want. Simply offering 20% deposit on second mortgage would instantly stimulate demand.  Currently have to pay off 100% of first property before can get mortgage on second property.

Buying and stockpiling commodities is probably a smart investment at the moment, way better than dollars or Euro's. Why would that stop or slow down.

China economy is still the energizer bunny and will continue to grow in Africa, Asia and South America as that's where the cheap resources are. Chinese are just starting to spend a little bit of their savings and they are enjoying it, domestic consumption will continue to grow.

fourchan's picture

china should ask greenspan how to wreck their housing market.

silverdragon's picture

All they are doing is allowing the people that missed the property train to get aboard at a reasonable price.