Goldman Advises Exit China Stock Trade With 11% Gain
Nov. 11 (Bloomberg) -- Goldman Sachs Group Inc. recommended clients exit a bet that Hong Kong-listed companies in China will gain on concern the central bank will raise borrowing costs to tame inflation.
Investors who followed the New York-based firm's advice would have earned a return of 11.3 percent as the Hang Seng China Enterprises Index of 40 companies rose above 14,000 from 12,616.01 since April 1, when the trade was initiated, analysts Robin Brooks and Dominic Wilson wrote in a research note today. The recommendation was among the nine "Top Trades" Goldman Sachs made for 2010.
China's annual inflation rate jumped to a two-year high of 4.4 percent in October while retail sales rose 18.6 percent from a year earlier, the statistics bureau said today. China increased reserve requirements for some banks twice yesterday, taking the total increase to 100 basis points for a few lenders, according to two people with direct knowledge of the situation.
Inflation is above policy makers' "comfort zone" and more "tightening" will likely occur, the New York-based analysts wrote in the report. "The near-term risk-reward for this position also looks unappealing as we approach the year-end 'roll-off,'" they said.
The gain of Chinese stocks in Hong Kong beat the 2.7 percent increase in the Standard & Poor's 500 Index and 10.8 percent advance in the MSCI Emerging Markets Index of 22 developing nations during the period. China overtook Japan to become the second-largest economy in the world in the second quarter.
Higher Reserve Requirements
The H-share index reached 14,204.13 on Nov. 8, the strongest level since May 2008, and closed at 14,088.03 today. Goldman Sachs had a "target" of 15,000 for the trade recommendation.
Goldman Sachs has closed four of the nine "Top" trades, including two money-losing ones.
Clients following the bank's advice would have lost 24 basis points trading interest-rate swaps for the U.K. and Australia and lost 168 basis points in cross-currency swaps in Turkey. The advice of buying credit-default swaps in Spain and selling similar contracts in Ireland returned 2.9 percent.
Profitable Advice
Three of the five remaining recommendations are poised to be profitable, including buying Russian stocks, wagering a rally in currencies tied to growth and a trade involving U.S. stock volatility.
The trade of buying the Polish zloty against the Japanese yen has declined 12 percent since it was initiated in December and the bet on the British pound's gain versus the New Zealand's dollar has lost 10.6 percent, according to data compiled by Goldman Sachs and Bloomberg.
The People's Bank of China said in a statement yesterday banks' reserve requirements will rise 50 basis points from Nov. 16, the first nationwide increase since May. China ordered some lenders, including Bank of Communications Co., to raise their reserve ratios by an additional 50 basis points, or 0.5 percentage point, from Nov. 15, a person with direct knowledge of the matter said yesterday.
The "long-term outlook" for emerging-market stocks remains favorable as growth in developing nations is "robust" and the companies there benefit from the low interest rates in major economies, the Goldman Sachs analysts wrote.
"It will be important to be more selective going forward," the analysts wrote.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net
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