I think this qualifies as the definition of a “reversal.”
In 2010, Goldman Sachs’ (NYSE: GS) Asian division notched a whopping $2.1 billion profit.
But last year, Asia proved to be the Bermuda Triangle for Goldman, as that impressive gain turned into a demoralizing $103 million loss. It was the company’s first decline in Asia since 2008.
Goldman investors paid the price today, with shares slipping by $4.96 (4.1%). It wasn’t just them, though. Given Goldman’s influence in the banking sector (it’s America’s fifth-largest bank by assets), the news sent other bank stocks into retreat. The Financial Select Sector SPDR (NYSE: XLF), which tracks the performance of financial stocks, also slipped by 2.4%.
So what drove Goldman’s epic loss?
Get Your Shovel Out… We’re Going Digging
At first glance, it would be easy to blame it on the general tanking that Asian stocks endured in 2011. For example, China’s Shanghai Exchange, Hong Kong’s Hang Seng and Japan’s Nikkei 225 tumbled by 22%, 20% and 17%, respectively.
There’s no doubt that this had an effect on Goldman’s Asia fortunes (or lack thereof). But it doesn’t tell the whole story when you consider that some of the company’s rivals fared well over the same period.
Last week, for example, Standard Chartered reported a 46% surge in 2011 profits from its Greater China market (including China and Hong Kong). Coincidentally, the profit totaled $2.1 billion – the very same number that Goldman posted in 2010.
So, no… we can’t blame totally Goldman’s poor Asian performance on the general beating that the region’s stocks took in 2011. Rather, the bulk of it stemmed from a $517 million loss for Industrial and Commercial Bank of China (ICBC). It’s China’s biggest bank and Goldman holds a 10% stake in the company.
Dig deeper still and it’s fair to say that the financial crisis in Europe – China’s largest trading partner – is one of the root causes. The twin combination of low growth and high debt choked off business at firms like ICBC.
So are Goldman’s Asian losses the start of a trend, or just an anomaly?
European Debt vs. Asian Growth
There are essentially two competing forces – Europe’s debt mess versus Asian economic growth.
I’ve noted here before that Europe’s perilous situation poses a long-term threat to Chinese growth, in particular. But there’s one area it doesn’t seem to be affecting this year (at least so far) – the Asian stock markets.
On the back of those heavy losses in 2011, the heavyweight indexes have rebounded impressively. Japan’s Nikkei 225 is up 14%, while China and Hong Kong have posted gains of 9.6% and 12.8%.
As for ICBC, it’s also started 2012 on fire. The stock’s up 14% – a development that should consequently bode well for Goldman.
As Christopher Wheeler, an analyst at Mediobanca S.p.A., states in BusinessWeek:
“They’re [Goldman] going to get it all back in the first quarter.”
Numbers wise, he predicts a $900 million gain for Goldman on ICBC alone during the current three-month period. If so, it would make the company’s $103 million loss from all of Asia in all of 2011 seem like pocket change.