Goldman: If You Thought BRIC Growth Was Hot, Here's Why You Haven't Seen Anything Yet*

China Bull

Goldman’s Financial Conditions Index (FCI) attempts to quantify how stimulative or unstimulative financial conditions are for the BRICs nations (Brazil, Russia, India, and China), in a report by Tetsufumi Yamakawa.

The striking conclusion is that despite the recent credit crisis and talk of tightening monetary policy, BRICs financial conditions remain extraordinarily loose right now, in terms of stimulating economic growth.

Thus Goldman actually believes BRICs GDP growth could surge above its previous 10-year average — it could accelerate. Whether fueling a bubble or sustainable growth, the bottom line is that financial conditions are ultra-stimulative right now and will remain so. Except for in Russia, they’re screwed.

The BRICs Ultra-Loose Financial Conditions >
All charts and excerpts sourced via Goldman Sachs, ‘Financial Conditions in the BRICs’, Tetsufumi Yamakawa, 4 February 2010.

BRICs nations have been riding easy money conditions for the last 10 years. No wonder they grew like crazy.

'Our financial conditions indices (FCIs) provide us with a sense of the direct and indirect effects of monetary policy on the real economy.'

'With the exception of Brazil, all the other BRICs enjoyed a decade of relatively easy financial conditions, aided by lower interest rates and booming stock markets.'

While it's clear that BRICs nations tightened their financial conditions when the financial crisis hit at the end of 2008, they rapidly eased back afterwards.

Source: Goldman Sachs

In fact, China and India are now actually far more loose than they've been in a decade.

Chinese and Indian financial conditions have eased substantially post-crisis, they're now looser than pre-crisis even.

Brazilian conditions also remain very stimulative compared to its past decade.

Only Russia looks tight and unstimulative historically.

When it comes to easing, China and India are at the opposite side of the spectrum vs. Russia.

China has let the liquidity spigot loose via growth in M2 money supply...

While India has been driven more by lower interest rates.

Goldman believes Chinese and Indian economic growth will actually accelerate from previously rapid growth rates.

'In China and India, our forecasts imply that the economies will enjoy higher growth than the 10-year average.'

'In China, we believe policymakers will implement and gradually intensify policy tightening, including liquidity absorption, resumed credit control, investment control and three policy rate hikes, with the bulk of the weight falling on non-market-oriented measures. That said, both China's and India's financial conditions will likely remain accommodative, even if we see some tightening ahead.'

Source: Goldman Sachs

Brazil will accelerate as well.

As shown by their data table, Brazil will also accelerate above its 10 year average as shown by 'GDP Growth Minus 10Yr Average Growth'.

Source: Goldman Sachs

There's already some evidence of this, BRICs industrial production is already staging a massive rebound.

Yet poor Russia will exhibit decelerating growth. Financial conditions are unstimulative relative to other BRICs.

'Russia is the only BRIC economy that we forecast to grow below its 10-yr average. It is also the only BRIC where we expect monetary policy to remain accommodative.'

Source: Goldman Sachs (An explanation of the FCI is two slides down...)

Yet Goldman will still be bullish on Russian stocks.

'Despite the gloomy picture painted by the Russian FCI, oil prices and a stronger RUB should be favourable for Russian equities, which we are currently recommending as one of our Top Trades for 2010.'

We suspect the Goldman report was probably forced to jive with what the Russian equities guys were saying, but it's just our guess.

Regardless, the important distinction based on stimulative financial conditions (if you value Goldman's index of course) is that Brazil, China, and India could enter a phase of accelerating GDP growth, while Russia could fall away from the pack and decelerate.

The MAVINS will benefit enormously if this is true...

A brief explanation of Goldman's FCI:

'FCIs give us a sense of the direct and indirect effects of monetary policy on the real economy, and generally include market rates, exchange rates and equity prices. An easier financial climate usually spurs growth but may open the door to inflationary pressures. We do not have an official FCI series in Brazil. Hence, we have approximated financial conditions for Brazil using a similar methodology to other FCIs. We chose similar components--real short- and long- term rates, real equity prices and the BRL real trade- weighted index--and weights to other emerging market FCIs. However, we weighted the FX component less, as Brazil's economy is less open than other EMs, and put a higher weight on short-term rates, as there is less of a focus on long-term rates in Brazil.'

Now understand the MAVINS economies >>
Source: Goldman Sachs

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