Goldman Says Buy China, Russia Stocks on Valuation to Reform

Goldman Sachs Group Inc. recommended buying Chinese (SHCOMP) and Russian stocks as a pick up in growth in developed countries and government reforms boost prospects for the “least-expensive” emerging markets.

Goldman upgraded equities in the two countries to overweight, the equivalent of buy, from market weight, saying Chinese banks and Russian energy companies could experience “modest valuation expansion,” according to a report today. The New York-based bank kept Korea and Mexico at overweight.

The Micex Index (INDEXCF) in Moscow trades at 4.3 times projected 12-month earnings, while the multiple for the Shanghai Composite Index is 8.6, according to data compiled by Bloomberg. That compares with 10.5 times for the MSCI Emerging Markets Index. China, the world’s second-largest economy, and Russia, the largest global energy exporter, are “relatively insulated” from concern about Federal Reserve stimulus tapering, which may start around March 2014, Goldman said.

Efficiency of capital allocation and the treatment of minority shareholders “are improving,” analysts including Christopher Eoyang said. “In Russia, we feel the market is over-focused on the importance of the price of oil, and unwilling to credit the effects of various reform programs, the drive for greater efficiency” and a potential increase of energy exports to Asia, it said.

Photographer: Daniel Acker/Bloomberg

Goldman Sachs Group Inc. upgraded equities in the two countries to overweight, the equivalent of buy, from market weight, saying Chinese banks and Russian energy companies could experience “modest valuation expansion,” according to a report today. Close

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Photographer: Daniel Acker/Bloomberg

Goldman Sachs Group Inc. upgraded equities in the two countries to overweight, the equivalent of buy, from market weight, saying Chinese banks and Russian energy companies could experience “modest valuation expansion,” according to a report today.

2014 Outlook

As developed countries overtake their emerging counterparts in their contribution to global growth in 2014, China and Russia will benefit, Goldman said, also pointing to greater collaboration between the two in energy. The “net effect” of reforms unveiled after China’s Third Plenum meetings this month “will be to increase the sustainability and balance of Chinese economic growth,” it said.

The MSCI Emerging Markets Index has underperformed the developed-country gauge this year, declining 4.8 percent, compared with a 26 percent gain for the S&P 500 Index. In 2014, emerging-nation equities “should rebound as the developed market recovery becomes more evident,” Goldman said.

Defensive and domestic cyclical areas could face “multiple compression” as emerging markets rebalance to adjust to tighter policy rates, weaker currencies and slower domestic demand growth, analysts said. Goldman kept its recommendation to be overweight exporters and underweight domestic cyclicals at the start of 2014.

To contact the reporter on this story: Maria Levitov in London at mlevitov@bloomberg.net

To contact the editor responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net

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