THE 8 REASONS GOLDMAN SACHS SAYS BUY THE CHINESE SELL-OFF
Goldman Sachs is bullish on China. So bullish that they think the concerns regarding the recent 25% sell-off are far overdone. Following are the 8 reasons why Goldman says to buy the dip, particularly resource related names:
We see a mismatch between the recent 20% share price pullback and still robust underlying real demand. We see 8 stock-picking themes emerging:
(1) Our channel checks with a low-voltage copper transformer producer indicate demand is rising, with August shipments back to 2008 peaks.
(2) Along the value chain, we do not think the market has priced in the better-than-expected speed of economic recovery, positive for upstream commodities like coal; traders indicate positive surprise on coal demand.
(3) The magnitude of demand recovery may potentially lead to tightness in commodities (such as steel) long perceived as oversupplied; this offers potential upside in undervalued stocks. Steel traders see robust demand.
(4) Economic recovery in OECD countries (which account for about 40% of global consumption) could provide an additional boost to commodity prices, which are already buoyed by strong demand from China.
(5) China’s increasing percentage of global consumption structurally boosts the sustainability of this upcycle, reducing potential OECD “double dip” risk. Our new analysis shows a 10% increase in Chinese demand now offsets OECD weakness 2-3 times as much as it did in 2002 when China first joined the WTO.
(6) Sustainability of supply-side tightness to cushion rising raw material costs; we see copper/steel/coal as favorably positioned.
(7) Consolidation leaders such as Shenhua/Angang/Baosteel could see leverage increase for the upcycle via parent asset injection, in our view.
(8) Valuations are still around/below mid-cycle, such as steel/coal names.
Source: Goldman Sachs
Chinese government has announced to reduce the steel production capacity by 30%, and the same with coal production; Goldman’s stand on China is rather strange.
Wha is Goldman’s position on US, buy the dips till 1060?
@MS
I agree with you MS.
See recent comments on falling iron ore prices: (http://business.smh.com.au/business/iron-ore-price-slump-may-hit-bhp-billiton-and-rio-20090903-f9yb.html).
Which means no recovery in coal prices.
I suspect this note/paper by GS has been 3 months in the making. And now out of date.
3-Sep-09
“The main cause of the surge seems to be a statement made Liu Xinhua, vice chairman of the China Securities Regulatory Commission, at a forum in Beijing yesterday which was proclaimed on the front pages today of China’s two biggest financial newspapers, the China Securities Journal and the Shanghai Securities News. Mr. Liu promised that regulators will promote a “stable and healthy” market. This has been interpreted to mean that the authorities will not let the market continue falling, and will introduce measures to force it up”
….
“Without rapid future consumption growth, as I have argued many times, I just don’t see how China can support rapid GDP growth once the huge fiscal push becomes unsustainable and runs out of steam.”
http://mpettis.com/
Michael Pettis is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets
Funny Goldman’s conclusions are polar opposites of my own (see ‘Steel as a proxy for BHP’ and ‘Copper and BHP’ at pazzomundo.blogspot.com)
1) Copper shipments were bid up on fiscally inspired consumption and stockpiling (up to 400,000 tonnes)
2) Coal/oil ratio may be trading on the low side but expect a lower oil price will fix this
3) Steel stocks are neither undervalued nor are the price assumptions behind the broker assumptions. Steel capacity utilisation has been high off the fiscal stimulus but stockpiling has now kicked up. Witness its price weakness over the last couple of weeks.
4) OECD demand has to go a long way before it recovers its 2008 glory.
5) China relies on exports for its growth – its whole economy is geared around this. It will take years for domestic consumption (other than the government) to make a material difference to world demand.
6) I’ll have to take their word for it (but they don’t have great form on this front)
7) Consolidation is not going help commodity prices – that is just silly. China’s 72 steel producers lost money is the first quarter of 2009, the government is sponsoring the consolidation and Goldman’s thinks that they will let the likes of BHP continue to run at 40% EBIT margins?
8. I though this was covered in point 3?
Better get back to my therapist…
China is dreaming that it can grow sustainably at red hot rates of growth without huge export demand.
Maybe they said to buy for this reason:
http://www.dailyfinance.com/2009/09/04/china-set-to-increase-foreign-investment-limits-to-1-billion/