Goldman Sachs, the US investment banking giant, has issued a short-term alert over investing in India and China due to the impact of rising inflation, advising clients to rotate into Wall Street and other bourses as a safer bet over coming months, a media report said on Tuesday.
"We're not as tactically positive on the BRIC as we have been," said Tim Moe, the bank's chief Asia-Pacific strategist, referring to the quartet of Brazil, Russia, India, and China, the Daily Telegraph reported.
"To be frank, we may have held on too long to our overweight position in China last year. We have decided that discretion is the better part of valour and have tactically reduced our weight. Asia is not in the sweet part of the cycle. The longer-term picture of Asia outperforming the US is taking a breather," he said, speaking at a Goldman conference in London.
The cooling ardour for China is significant shift for the bank that coined the term BRIC and has been the cheerleader of the emerging market story over the past decade.
According to the report, India is an even bigger worry, with yawning twin deficits, and overheating visible on all fronts. The nation's central bank warned this week of "surging inflation".
"India's current account deficit is running at a record pace of 4.1% of GDP and it is 100% funded by short-term portfolio flows, which cannot be relied on indefinitely," said Moe, describing Mumbai's bourse as "crowded".
Goldman insists that the longer-term super-boom remains healthy in both the BRIC nations and a broader group of countries, or "N-11", led by South Korea, Indonesia, the Philippines, Turkey and Egypt.
Goldman expects China to rebound strongly in the second half of the year, distancing itself from the ultra-bearish views of those such as hedge fund star Jim Chanos betting that Beijing will prove unable to engineer a soft landing from its property bubble.
The surprise for 2011 will be a torrid recovery in the US, with growth of 3.4% to 3.8%, as the country confounds critics and averts a post-bubble "Lost Decade".
Even Japan will outshine China, pulling out of its deflation trap, with earnings growth of 23 % this year and 22 % in 2012.
Kathy Matsui, Goldman's Tokyo strategist, said Japanese equities may be the best way to play the Pacific growth story since the average price-to-book ratio is 1.0, compared to 1.9 for China and the rest of emerging Asia.