Why We’re More Gloomy About BRICs: Goldman
Goldman Sachs says it has ended a recommendation to buy a basket of U.S. stocks with the highest sales exposure to Brazil, Russia, India and China (BRIC) and instead prefers U.S. firms with most exposure to the domestic market – just one more sign that sentiment towards emerging markets is fading fast.
The U.S. investment bank said its decision was based on revised expectations for slower growth in China, the world's second largest economy. Goldman last week cut its 2013 China growth forecast to 7.4 percent from 7.8 percent.
"The contrast between accelerating U.S. GDP [gross domestic product] growth and weakening and uncertain China growth represents a headwind to U.S. firms with high BRICs [Brazil, Russia, India, China] sales relative to domestic-facing firms," Goldman Sachs said in a note published on Monday.
(Read More: Goldman Downgrades Outlook for Asian Stocks)
It estimates that the median company in its basket of U.S. stocks with the highest BRIC exposure will grow sales by 3 percent this year, compared with 6 percent for a basket of U.S. stocks with most exposure to domestic sales.
Sentiment towards emerging markets has been hit hard in recent weeks by concerns about an unwinding in U.S. monetary stimulus and signs that China's economy is slowing faster than anticipated.
Goldman is just one of several banks to slash their China GDP forecasts over the past month or so, with data on Monday adding to the bearish sentiment towards the Chinese economy.
China's official purchasing managers' index (PMI) slipped to 50.1 in June from 50.8 in May, while the HSBC PMI fell to a nine-month low of 48.2, remaining below the 50-mark that divides expansion from contraction.
(Read More: China: From Driver to Drag on Global Growth)
In contrast, data released on Monday showed U.S. manufacturing activity grew in June, rebounding from an unexpected contraction in May.
But China is not the only country in the BRIC grouping to have received gloomy news of late. A fall in the Indian rupee to record lows against the U.S. dollar last month has raised concerned about India's ability to finance its current-account deficit, while there is unrest in Brazil, which has struggled with mass protests on a number of issues such as corruption, fares on public transport and high crime levels.
Goldman said that its basket of U.S. stocks with the highest BRICs sales exposure has returned 15.6 percent since it recommended the trade in late November last year. That is close to the 15.4 percent returns on the S&P 500 but below the 17.5 percent returns on its basket of U.S. equities with a greater exposure to U.S. sales.
(Read More: Emerging Market Growth Hits Lowest Since Financial Crisis)
"We originally expected [U.S. stocks with BRICs sales exposure] to outperform on increased confidence in the strength of EM [emerging market] economic growth relative to stocks with higher exposure to the U.S. economy, where we expected a mid-year growth 'hump' as a result of fiscal policy headwinds," Goldman said in the note.
- By CNBC's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC