Is Goldman the Next Lehman?

Ivan Martchev, April 20, 2010

Why do we care about Goldman Sachs (NYSE: GS) in Asia Insider if we believe in emerging markets and natural resources?

The BRIC quartet still has decades of economic development ahead of them, which is good news for those interested in investing in BRICs' future. But, the global financial crisis was manufactured on Wall Street and caused losses for emerging markets' investors that, frankly, were not necessary. What happens on Wall Street affects the BRICs and demand for natural resources, so we have to pay close attention to how this crisis is evolving.

China is a huge trading partner for the U.S. and the West. As a result, Western problems affect China more disproportionately than India, which is a relatively closed economy. It is in everyone's best interest -- especially emerging markets' -- that this mess on Wall Street is sorted out and does not repeat again.

Since Goldman Sachs is the most profitable firm in Wall Street history, it is natural in an election year to pick Goldman as a target of an SEC investigation. There is the perception that the Obama Administration did everything possible to bail out Wall Street, while Main Street is struggling with near 10% unemployment and much higher levels of underemployment.

It is my gut feeling that this investigation will drag right into the fall election season and that many others may follow. Other countries are going to follow with their own investigations. Plus, there is a financial reform bill in Congress that needs passing. As the century-old Chinese saying goes: "May you live in interesting times," and "may you come to the attention of those in authority" -- oops, looks like that is exactly what is happening with Goldman Sachs right now!

BRIC Banks Are Way Better than Wall Street Ones

We continue to maintain that the better banks to own are those in BRIC countries that are privately-held and serve the interests of their shareholders, not necessarily the governments they answer to.

China: In China there was a problem with state-run banks that made loans to state-run enterprises. Still, a lot of progress has been made in China by privatizing the banks. China Life Insurance (NYSE: LFC) is an example of a Chinese financial that has been a spectacular success since it was sold to the public. Looking forward, as more and more of the Chinese economy goes into private hands, higher profits will be at the macro level as the companies are likely to be run in a much more efficient manner.

India: Indian banks are also great examples of conservatively-run financial institutions. ICICI Bank (NYSE: IBN) and HDFC Bank (NYSE: HDB) take in deposits, make loans and serve their corporate customers, the way Wall Street used to be. They have remarkably low amount of problematic corporate loans, which shows highly competent management.

Brazil: The same goes for Brazilian banks. Brazilian banks are probably just as conservative as Indian banks given the bitter experience of Brazil's inflationary times. Luckily we have three choices: Banco Bradesco (NYSE: BBD), Banco Santander Brazil (NYSE: BSBR) and Banco Itau (NYSE: ITUB). They all have their little differences, but they each have great potential given the stellar monetary policy that the Brazilian central bank conducts. As a reminder, Brazil typically has the highest interest rates from the BRIC universe, which is a policy that we don't foresee ending anytime soon. This slows the economy a little, but creates a healthier and more robust environment in the long-run.

Russia: There are no ADRs of Russian banks available, but I have to note that Russia has the highest volatility in its economic growth model of any BRIC country. The extreme leverage towards oil prices is a positive at a time when oil prices are rising and a negative at times of sharp oil price corrections. However, I don't foresee another oil price drop that takes the oil price from near $150 to nearly $30 in a matter of six months so the downside volatility in the Russian economy is largely contained. In fact, I foresee that in the next 10 years there is a high chance that the $150 high in oil is surpassed. So, if there are ADRs of Russian banks in the future, I would love to consider them. Russian economic reforms towards a more balanced model -- along with some needed political reforms -- is the best course of action.