Stephen Roach – Spotlight on BRIC Consumers

Monday, January 25th, 2010

Stephen Roach, Morgan Stanley’s Asia chairman, discusses with Demetri Sevastopulo, the FT’s Asia news editor in Hong Kong, whether consumption from China, India and the other Bric countries can ever substitute the US consumer.

He also argues that the centre of gravity in the global economy will never shift to the Brics unless they rebalance their economies toward growth driven by domestic demand.

Source: Demetri Sevastopulo, Financial Times, January 21, 2010.

Tags: Asia News, BRIC, Bric Countries, BRICs, Centre Of Gravity, China, Consumers, Consumption, Demand Source, Demetri, Emerging Markets, Financial Times, Global Economy, Hong Kong, India, Morgan Stanley, News Editor, Spotlight, Stephen Roach Morgan Stanley
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The BRICs are Rich, But Poor

Monday, January 18th, 2010

FT.com has a published an article on the rise of the BRIC economies and their contribution to world economic growth.

The chart below demonstrates how BRICs national income while relatively meagre on a comparative per capita basis will rise to $8,654, translating into a 61.3% growth contribution to the world’s economy, between 2008-2014.

Hat tip: Paul Kedrosky

Tags: Advertisement, BRIC, BRICs, Economic Growth, Growth Chart, Hat Tip, Paul Kedrosky, World Economy
Posted in Markets | No Comments »

Jim O’Neill: From BRICs with LUV

Monday, November 9th, 2009

Jim O’Neill, Goldman’s Chief Global Strategist, and coiner of the BRIC acronym, appears on FT.com’s Future of Finance to discuss his views and outlook for BRICs, emerging markets, and about the long term effects of the financial crisis.

In the segment, O’Neill forecasts 9% GDP growth for the BRICs and 1.9% for the developed countries. O’Neill says that the economic decoupling of BRIC was far more than the notional concept that many thought of it. The BRIC are being driven by the growth of domestic consumption versus the deleveraging of over-indebted consumers, companies and governments in the developed world.

O’Neill discusses China and Goldman’s forecast of 11.9% GDP growth for 2010, and says that in order for China not to come in at that forecast it would have to slow down from what its at now. O’Neill says that by his account, China’s momentum has it coming in at 13% GDP growth and the insitutional outlook elsewhere for more conservative growth is due to rigidity.

Chinese consumers are now buying 1,000,000 cars, and 15 million mobile phones monthly.

O’Neill says that China is more likely to print closer to the 11.9% GDP growth forecast than the 8% forecast consensus from other institutions.

The crisis has been good for China, because it has taken them off the exports drug. Export growth would have been unsustainable. It would have been difficult for China to stop it themselves. In many ways, O’Neill says, this global financial crisis was like an “act of God.”

The Chinese have responded to it.

O’Neill says its likely the Chinese will tighten up lending to cool things down a little, and counters that they have proven that they are able to massage things well after having gone through several crises now.

Also discussed are Sir Martin Sorrell’s LUV concept - his idea that Europe will experience an L-shaped recovery, the US will have a U-shaped recovery and Emerging Markets will have a V-shaped recovery.

The interview is compelling and enlightening, as O’Neill is one of the brightest minds in global finance. I recall earlier this year when O’Neill was opposite Nouriel Roubini for an interview at Lake Como in Switzerland, thinking that he was refreshingly optimistic at a time when things were so gloomy.

Tags: Acronym, Act Of God, BRIC, BRICs, Cars, China, Chinese Consumers, Consensus, Crises, Decoupling, Developed Countries, Domestic Consumption, Emerging Markets, Finance, Financial Crisis, GDP, GDP Growth, Global Financial Crisis, Global Strategist, Gold, Goldman, Institutions, Mobile Phones, Momentum, O Neill, Outlook, Rigidity, Sir Martin Sorrell
Posted in Emerging Markets, Gold, Markets | No Comments »

Goldman Recommends Companies with High Sales Exposure to BRICs

Friday, October 9th, 2009

Goldman Sachs recently put out a report, and continue to follow it up, in which they aggressively recommend overweighting US companies that have high sales exposure to BRIC economies, as they have been outperforming the market and are expected to continue to do so.

The basis of this is Goldman’s outlook for growth in the BRICs next year. GS expects BRICs combined GDP to grow by 8.7% vs. the consensus 7.2%, with China and India leading the way. For China and India, Goldman’s outlook for growth is also more aggressive with China registering 11.9% and India 7.2% in 2010.

Goldman’s BRICs hit list of 50 companies makes the case, with Year-To-Date performance of 43% vs. 17% for the S&P 500. Its hard to argue with Goldman, given that they rule the BRICs trade, and to their credit, coined it themselves.

Goldman said:

We favor exposure to Brazil, Russia, India and China (BRICs) over developed markets given the significantly higher GDP growth outlook. We believe investors should use this basket to identify stocks with high exposure to emerging market growth. Long/short investors should consider buying this basket against the S&P 500 to gain exposure to higher growth in the BRICs countries versus slower growth in developed regions.

In its morning notes yesterday GS said:

BRICs-exposed companies outperform during earnings season Our basket of 50 stocks with high sales exposure to BRICs economies has posted stronger sales growth and surprises than the S&P 500 during the past 10 earnings seasons. We believe this outperformance will continue.

Here is Goldman’s list:

Download the GS Slideshow: goldman-research-where-to-invest.

Tags: Advertisement, Amp, Brazil, BRIC, BRICs, China, Consensus, Countries, Earnings Season, Emerging Market, Emerging Markets, GDP, GDP Growth, Gold, Goldman Sachs, Growth Outlook, High Exposure, India, Investors, Leading The Way, Outperformance, Russia, Stocks, Surprises
Posted in Emerging Markets, Gold, Markets | No Comments »

Bespoke: BRIC countries continue to surge

Sunday, May 31st, 2009

Bespoke Investment Group, who do a brilliant job charting, have put together the year-to-date look at BRICs vs. S&P500 [below].

Are emerging markets equities decoupling once again from developed markets equities?

It may still be too soon to tell, however, a recognition of the underindebtedness of BRIC-based companies and consumers, healthy banking systems, sound fiscal and monetary policies, as well as a resurgence in government spending and domestic consumption could be behind the recovery which has taken place in Emerging Markets since last November’s lows, which began 4 months sooner than the equity market recovery in March in the G-7.

Oil’s surging recovery from the $30s to $66 [Friday], and the weakening Greenback [which has been good to commodities' prices] have provided a further boost to Russia and Brazil’s commodity complex.

A landslide general election victory for India’s incumbent Congress [Liberals] coalition government has cleared the way politically for India to move forward on much needed reforms for at least the next 5 years.

China’s economic rebalancing, via its $600-billion stimulus appears to be trickling very solidly into the corporate sector and the economy, much faster than anticipated.

Time will tell.

Russia’s RTS stock index was up another 3.2% today [Friday], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they’ve far outpaced stock markets of so-called ‘developed’ countries. Below we highlight their year to date performance compared to the S&P 500. As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.

Source: Bespoke, May 29, 2009.

Tags: Banking Systems, BRIC, Bric Countries, BRICs, Brilliant Job, Coalition Government, Commodities Prices, Corporate Sector, Domestic Consumption, Election Victory, Emerging Markets, Fiscal And Monetary Policies, government spending, Greenback, India, India China, Investment Group, Last November, P500, Rebalancing, Stock Index, Stock Markets
Posted in Emerging Markets, Markets | No Comments »

BRICs, Canada Showing Relative Strength

Monday, May 25th, 2009

It appears that the countries with either the healthiest banking and financial systems, or strongest economic growth fundamentals, or large commodity complexes, or or all of the above, are enjoying a stronger recovery in equity markets than those with significant exposure to the current financial crisis that sank the G7 economies.

It looks as though global investors are focused on Canada as the standout from G7, with its strong financial system and significant commodity complex, despite its trade exposure to a crippled US consumer, and the BRICs with their strong consumer/producer pairings. All of the BRICs have sound fiscal positions, substantial forex reserves, many years of current accounts coverage, little or no direct exposure to the West’s financial and credit crisis, and billions of underlevered consumers. There seems to also be a recognition of the comparative underindebtedness of emerging markets’ companies and their resilient domestic consumption supports.

“With global equity markets still in rally mode, below we highlight
the year to date performance of the major indices for 83 countries
around the world. After nearly every country was down earlier in the
year, 62 out of the 83 are now up in 2009.

“Peru is up the most at 72.92%, while Costa Rica is down the most at
-39.94%. And the BRIC (Brazil, Russia, India, China) countries are
significantly outperforming the developed G-7 countries. Russia, India,
and China rank 2nd, 3rd, and 4th in terms of year to date performance,
and Brazil isn’t far behind in 10th place.

“Canada has been the best performing G-7 country with a gain of
12.62% in 2009, but it ranks 35th out of 83. The rest of the G-7
countries are bunched up in the 0%-5% range, which is closer to the
bottom of the list than the top. And the US is the worst of the seven
with gains of less than 1%. While the markets here in the US have
rallied nicely off of their March lows, most other countries have
bounced back even more 2009.”

Source: Bespoke, May 19, 2009.

Tags: Banking And Financial Systems, Bottom Of The List, BRIC, Bric Brazil, BRICs, Canada, Countries Around The World, Credit Crisis, Current Accounts, Domestic Consumption, Emerging Markets, Fiscal Positions, Forex Reserves, Global Equity Markets, Global Investors, India, India China, Lows, Major Indices, Place Canada, Rally Mode, Relative Strength, Standout, Year 62
Posted in Emerging Markets, Markets | No Comments »

Jim O’Neil and Nouriel Roubini: FT.com Interview

Friday, April 17th, 2009

April 6, 2009: Nouriel Roubini of New York University and Jim O’Neil, Chief Economist at Goldman Sachs, talk to John Thornhill about the G20 summit and the road to economic recovery.

Click image to see video.

John Thornhill (FT.com): Nouriel, The G20 has just concluded. What difference do you think the agreement will make to the global economy?

Nouriel Roubini: There was some positive developments, I think the most important one was this commitment of resources for the IMF is going to triple the resources of the IMF. There is also the creation of this new SDR, Special Drawing Rights. There are many Emerging Market economies that are in trouble, some of them with better market financial and policy fundamentals subject to a liquidity crunch, a sudden stop and reversal. You know the Brazils and Chiles and Mexicos of the world, and some others which have significant financial difficulties because of policy mistakes. And imbalances like those in emerging europe on the verge of a financial crisis. So I think that these additional IMF resources provide monies to both groups of emerging markets and help both of them to avoid a more severe crisis, especially those who are in trouble, they need good policies and IMF resources.

John Thornhill (FT.com): Now the three of us were here exactly a year ago, and Nouriel, you were pretty pessimistic about the global economy and Jim, you’re more upbeat, and ummm, I guess Nouriel won that argument, but um you see Jim is of hope again, in the global economy.

Jim O’Neil: Well, maybe I’m an perpetual optimist. Part of the reason why I guess I had a different view a year ago is to do with the whole focus of mine, you know, often about the role of China and the so-called BRICs. And, whilst China has been really severely challenged by the crisis, in the past couple of months theres some encouraging signs that China might be actually coping with it better than many other countries. That’s really where I see the most sustainable glimmers of hope. And then, even in some of the real crisis places, the UK actually, is showing one or two cyclical signs that the severity of the problems are starting to ease a little bit. We’ve had a tiny glimmer of that in the US as well. I guess what I really see is that its unlikely that the worlds going to continue decelerating at the rate that its been doing since October.

John Thornhill (FT.com): I think Nouriel, do you agree with that?

Nouriel Roubini: I agree in the following sense that the peak of the economic contraction in the US and in advanced economies and emerging markets was between the 4th quarter and 1st quarter of this year, you know a contraction of -6 percent among advanced economies compared to this contraction I think policy stimulus, monetary fiscal and otherwise, is going to imply that this economic contraction is going to slow down the rest of the year but while the more bullish consensus is US growth by Q3, it will be positive, by Q4, close to 2%, and next year something closer to a potential 2 to 2.5%. My view is that the imbalances of the United States are going to imply that economic growth is going to be negative in the second half of this year, -2% still by the fourth quarter, and next year the recovery’s going to be so weak, less than 1%, between zero and 0.5%, and then unemployment rising to above 10% and effectively its going to feel like a recession even if we’re technically out of the recession, so certainly I do believe that that 2nd derivative is in due time becoming positive, but has to be very positive for reaching faster rather than later the bottom, and therefore I see that bottom of that business occuring later than those who are more optimistic. [351]

John Thornhill (FT.com): There still seems to be a lively debate about the relative risks of inflation or deflation. Which do you think is the bigger threat at the moment?

Jim O’Neil: I’ve a pretty simple stance on that. I get asked it all the time everywhere I travel. I can almost anticipate it coming, “Aren’t you really worried about inflation?” My view is that its a nice problem to have. We’ve lost so much output the past 6 months around the developed world, there’s just no pricing power, and unless we can stop the deflationary mechanism now, the last thing people should be worried about is inflation, and be actually wanting to have some. Moreover, even if I’m wrong with aspects of that, against a background of globalization hopefully continuing, I think once you see any evidence of pricing pressures or inflation starting, compared to the current challenges policymakers have got it would pretty easy to stop. I don’t have the same concerns as appear to be so widely held by many many people in the financial markets all over the world, its quite interesting.

John Thornhill (FT.com): Nouriel, one of the most optimistic things I’ve heard over the last two days is that you’re now beginning to talk about an ‘exit’ strategy out of this economic crisis., but you nonetheless say that this is going to be very difficult. Could you explain that?

Nouriel Roubini: Well, you know, I agree with Jim, that deflationary pressures are going to be very significant. Over a year ago, I wrote this piece, titled, “The risk of a Global Stag-deflation Depression,” a combination or recession and deflation, because I was expecting a severe global recession, and now the slacking goods market, with demand falling relative to supply, and the slacking labour market, where the unemployment is going above 10% for most OECD countries, the slacking commodities market means that for the next few years, means that deflation is going to be the problem to be faced and therefore this huge output gap and slacking labour market would have to shrink significantly before we’re going to have any kind of pressures on resources.

I think that eventually, but that’s kind of a 2011 story, not even a 2010 story, there would have to be a mop up of the liquidity once there is a more sustained US and global economic recovery, and that’s going to be a tricky issue. I think the lesson we learned from the last bubble is that the Fed cut rates and kept them too low for too long and then the normalization occurred too slowly, 25 basis points every 6 weeks.

This time around you want to normalize it faster, not just because you worry about the inflation, but also because you should worry about asset inflation, creating another bubble, but the problem is that if the recovery is tentative, then you want to do is slowly because of the concerns about the growth, but on the other side, if you do it too slowly, you could create down the line, another asset bubble, more than actual inflation. That exit issue is going to be a serious issue, how you mop up the liquidity, how you sell back to the market all these illiquid and toxic assets you bought, how you make sure that these fiscal deficits are shrinking so you don’t have to monetize them, so you don’t cause longer term inflationary pressures.

Certain things are not questions that we have to worry about today or next year, but by 2011, we’ll have to start thinking about those questions.

John Thornhill (FT.com): Do you think, Jim, that there is a risk that we’ll have an unsustainable recovery because of the policy mix.

Jim O’Neil: Well, you know, listening to Nouriel, and thinking about it myself, its difficult to avoid creating booms and bursts, that’s almost how life is. I think there is a likelihood that to solve this crisis, governments will probably overextend their friendliness, and could create quite a few issues in the government bond markets around the world. We’re already seeing one or two signs of that. But, again, when I think about what those challenges would be, compared to the ones that they’re currently facing, I think they’re relatively manageable.

At least I certainly hope so.

John Thornhill (FT.com): Final question to both of you. What is the danger of a political backlash to globalization and could that derail any global recovery?

Nouriel Roubini: certainly the longer this crisis lasts, the more severe it is, the more the [risk of] backlash is there, in terms of backlash against the markets, against globalization, against free trade, in the form of financial protectionism, and a whole slew of actions. The G20 November promised free trade and now we know that 17 out of 20 countries already have had protectionist actions. 50 plus actions, and that’t the risk. That’s why in my view, its so paramount that we follow the aggressive monetary, fiscal, credit, and other policies to clean up the banks, to make sure that the recovery occurs faster than otherwise because the longer the crisis lasts, the more this backlash is going to be, and then you’ll have a risk of a vicious circle with that backlash and the policy actions that are negative, having negative effects on the economic recovery.

John Thornhill (FT.com): Jim?

Jim O’Neil: I’ll bring you back to where you started at with the G20. Again in the statement, they re-iterated slightly more briefly than in November, a strong stance against protectionist policies.

Its really important they follow it up this time and stick with it, because this time, the thing that would cause me to change my relative optimism would be a further acceleration of protectionist tendencies around the world. And I think its really really important that it doesn’t happen otherwise things will be a lot worse, and then could end up being a much more prolonged
problem, and a severe cyclical recession.

In that regard, another thing that I’m encouraged about from the BRIC world, is that the two big population nations, China and India, interestingly enough, despite how much we all stress out in Western Europe and the US, don’t appear to have lost any of their desire to slowly engage more and more in the world through trade and financial liberalization, which in many ways is the one thing that really grounds me in longer term hope, because if you really think about the engines of world activity the past decade, as much as its been the US, its been these guys, and if they lose their enthusiasm for engaging with the rest of the world then we’d have an entirely different situation.

END.

Tags: BRIC, BRICs, Chief Economist, Chiles, Economic Recovery, Emerging Europe, Emerging Market Economies, Emerging Markets, Financial Difficulties, G20 Summit, Glimmers, Global Economy, Goldman Sachs, Imf Resources, India, John Thornhill, liquidity, Monies, New York University, Nouriel Roubini, O Neil, O Neill, Optimist, Special Drawing Rights
Posted in Bonds, Commodities, Credit Markets, Emerging Markets, Gold, Markets | No Comments »

How are the BRICs Doing?

Wednesday, March 18th, 2009

Highlighted below are two charts from Bespoke Investment Group detailing the relative performance of the BRIC Markets (Brazil, Russia, India, China) compared with the S&P500.

Over the last year, the US has performed better than Russia and China, inline with India, and worse than Brazil.  Russia’s stock market is down the most of the BRIC countries at -68%.  China’s Shanghai Composite is down 46% and has really seen a nice pickup lately.  India’s Sensex is down 43%, which is right inline with the S&P 500, and Brazil is down 36%.

The last ten years have been very tough for US equity markets, with the S&P 500 now down 42% on a simple price basis.  But even after the suffering that BRIC markets have had over the last year, their ten-year returns remain strong.  Russia is down 68% over the last year, but it is still up 689% over the last decade (we had to put its performance on a secondary axis in the chart below).  China is up 84%, India is up 136%, and Brazil is up 314%.

Its worth highlighting that during the last decade, markets in Brazil, India, and China, experienced their strong run-ups while adhering to the advice that was given to them by the IMF and World Bank following the Long Term Capital Management fiasco, of fiscal and monetary prudence, and are today in a very sound fiscal and monetary condition. All four have amassed sizable forex reserves, consumers and corporates have under-utilized credit, especially in Brazil and India, banking systems in Brazil, India and China are sound, well capitalized and negligibly exposed to toxic assets from the G6 credit spill. In addition, stocks are cheap with P/E ratios as follows: India 9X trailing earnings, Brazil, 9-10X trailing, China 12X trailing, and Russia at 2.5X (the cheapest by far).

Although they have performed in line with S&P500 during the last year (except for Russia) they are in a much better position to recover given their “cleaner” credit fundamentals and the fact emerging markets are expected to continue to drive almost all GDP growth over the next two years, according to the IMF’s January 2009 revision, which calls for a contraction in 2009 GDP growth and a recovery in 2010.

The break in commodity prices during the last year has provided the key consuming countries, India and China, and the rest of the world, for that matter with relief from inflation, and in the case of Brazil and Russia, highlighted the fact that low cost producers of hard and soft commodities will have an unusual advantage as consumption for commodities resumes, given their lower break-evens on production.

The by-product of lower commodity prices and the ensuing global recession is also providing emerging markets central banks the room to aggressively cut interest rates in order to stimulate and accelerate domestic consumption within their own economies. This is a favourable development during a time when foreign capital flows are beginning to rebuild post the credit market crosswind that caused investors to repatriate their investments en masse from emerging markets during the last year. In China’s case, its $586-billion stimulus program announced in November, which is set to be spent over the next two years, should not only contribute very significantly to China’s domestic growth, and shore up its weakened exports sector, it should indeed provide the world with a boost as well.

Its hard to know which of the emerging markets will have the best performance over the next 2-5 years, but there is a great likelihood, that given that they continue to be the key driver of economic growth over the same period, that they will do very well.

David Swensen, Yale Endowment’s Super-CIO, recently revised upward, (this can be found in the right hand column of his recent Yale Alumni Magazine interview) his recommended allocation to emerging markets funds for individual investors from 5% to 10%.

Today, Swensen says, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.

Jeremy Grantham, CIO, and founder of GMO, manager of $81-billion in assets re-entered his emerging markets trades in October-November 2008, after getting out entirely in July 2008. He had been long emerging markets for 12 years prior to the July exit, and was of the opinion that a 40% haircut was a good reason to get back in. You can read or view the interview transcript here.

Tags: Banking Systems, BRIC, Bric Countries, BRICs, Corporates, Emerging Markets, Fiasco, Forex Reserves, India, India China, Investment Group, Last Decade, Last Ten Years, Long Term Capital, Long Term Capital Management, P500, Price Basis, Prudence, Relative Performance, Secondary Axis, Sensex, Shanghai Composite
Posted in Commodities, Credit Markets, Emerging Markets, Markets, Outlook | No Comments »

Do BRICs (and Germans) Eat PIGS?

Saturday, February 7th, 2009

This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.

When the euro was introduced about ten years ago, the pessimists didn’t give it much chance of reaching its tenth anniversary. The euro, or so the argument went, was doomed from the outset because of the disparity in economic performance amongst the member countries. In this respect not much has changed. At one end of the scale you still have the highly disciplined, but also slow growing, economies of Germany and the Netherlands; at the other end you find faster growing but ill disciplined countries such as Spain and Greece. As icing on the cake, you also have countries that lack in both departments, such as Italy, making it difficult for the union to ‘gel’ – well, according to sceptics.

There is admittedly an embedded weakness in the way the European currency union is structured. In the United States, arguably the largest currency union in the world, fiscal transfers between member states allow for the federal government to adjust for variances in economic performance. There is no such mechanism within the eurozone, which explains why the member states are subject to a number of rules. These rules require strict fiscal discipline. The problem is that few countries play by the rules.

The best example of this is the huge spread in the rise of unit labour costs over the past few years. Unit labour costs measure labour (wage) costs adjusted for changes in productivity. It is probably the best measure that exists in terms of tracking the changes in competitiveness between nations. The currency union is governed by the so-called Stability and Growth Pact. There is no mention of unit labour costs in the pact which, with the benefit of hindsight, is a major mistake. Even Jean-Claude Trichet, the Head of the European Central Bank, who rarely admits mistakes, has publicly stated that if he could design the currency union all over again, he would push for a unit labour cost stability pact.

Back to the early sceptics. What they failed to realise was that Europe, together with the rest of the world, was about to enter a period of unprecedented prosperity. The good times would not only gloss over the  deeper problems, but the euro would actually go from strength to strength to a point where it now threatens to unseat the US dollar as the premier reserve currency of the world. It will be a mystery to some of you, then, why one should question the longer term viability of the euro. That is nevertheless what I intend to do.

Click here for the full letter.

* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.

Tags: Absolute Return, BRIC, BRICs, Competitiveness, Disparity, Economic Performance, European Currency Union, Eurozone, Executive Partner, Fiscal Discipline, Fiscal Transfers, Hindsight, Jean Claude, Member Countries, Member States, Niels Jensen, Pessimists, Stability And Growth Pact, Stability Pact, Tenth Anniversary, Unit Labour Costs, Variances
Posted in Markets | No Comments »

Jim O’Neill Discusses World, BRICs

Wednesday, January 14th, 2009

Jim O’Neill, Chief Economist, Goldman Sachs , who invented the “BRICs” asset class is interviewed by FT.com’s David Oakley regarding world markets, BRICs and Emerging Markets. Click on the image to watch Part I (the player will automatically play all three segments:

Click here for the second video on the BRIC economies.

And click here for his view on investment in emerging markets.

Here is a synopsis of the interview, which is worth watching:

Part I: World Markets

• I suspect [2009] its not going to be as bad as 2008.
• The worst quarter for the world economy may very well be the 4^th quarter of 2008.
• In some ways it was extremely bad, with -4-5% GDP growth annualized drop.
• Indicators suggest that there’s been a huge improvement since November.
• In the first 5 days of the year there was a slight gain in the S&P500, and those of us who look at that believe that as goes the first 5 days so goes the year.
• 80% of our clients are very negative about the world economy.
• Markets are markets, and if that is truly representative, then aren’t that many more who can get negative and improvements in anything will be a surprise.
• In think its possible for the US to have a similar outcome as Japan, and because of the Japanese experience, US policymakers have learned from their mistakes, and I don’t think that’s going to the case in America.
• After all the financial shocks that we got last year, especially during September and October, where it was one every two or three days at one point, which were so demanding. I’m assuming we got all the surprise shocks; if there is another surprise shock at this stage, then I would be once again concerned, that would be extremely worrying, it would force me to have a different view.

Part II: Regarding the BRICs (O’Neills favourite subject)

• Manchester United is actually Jim O’Neill’s favourite subject.
• BRICs come close to favourite.
• If you look at last year in the context of where its come from, its pretty obvious that in the midst of a major slump in the developed markets the BRICs would be affected.
• At the beginning of 2008, the BRICs, at least India and China, were trading at 2X the valuation of the US market. There’s no way they could cope with a 20-30% drop in a major markets with that valuation and slowing.
• When we started this thing [BRICs] the idea that these markets would go up every year forever was something we never believed.
• If you actually look at the returns, they’re still showing over 120% total returns since we started 7 years ago, and the S&P 500 is down 25% over the same period.
• Anybody who thinks the BRICs thing is over because of last year is living in a dream world, its just because they may have gotten in late.
• I think Russia is the independent weak link and the Russian story is by and large an oil price story, plus some political view as well.
• I’ve always believed for the last 3 years that we needed to see commodity prices dropping in order to see what would happen to Brazil and Russia who are very dependent on commodities.
• Clearly with the price of oil going down, that was not good for Russia. What you need to see there is a quicker changes about policy, or for oil prices to go up otherwise they’re going to have another tough year.
• One of my favourite ideas across the board, not just for the BRIC, is investing in Chinese domestic demand.
• Look at the fiscal and monetary policy response in China. It’s huge. There is some evidence already of monetary growth is already picking up in China. The freight indices such as the Baltic Dry Index and others have started to turn around again. I suspect that is a sign of Chinese demand already starting to turn for commodities which ultimately is going to be good for places like Russia (and Brazil); at its worst it will take a while; Russia will look like it’s in a recession, but the idea that Russia is finished is risky in itself.
• I’m surprised at the attention the bad Chinese export numbers are getting, given what’s happened to the US economy; obviously Chinese exports are going to be weak given that at one point China was exporting up to 10% of its GDP to the US.
• What you need to do is look at what’s happening going forward with China’s domestic demand policy, and on that score, I am very optimistic.

Pat III: Looking at opportunities in Sub-Saharan Africa

• I don’t think of BRICs as emerging markets, in the traditional sense. I think of them as the lynchpin of the modern globalized economy, because they’re all so big in terms of population.
• I do think it’s a different question to ask about emerging markets beyond the BRICs.
• If what I said about some recovery in some of the world’s major equity markets doesn’t happen then I think that a lot of emerging markets will struggle, but if I’m right and we do see some shoots of recovery in major markets, I would guess even some of the riskier ones will end up surprising people by showing strong returns.
• By and large, EM will be at the riskier end of the spectrum, so when things go down, they tend to suffer the most, and when things go up they tend to do the best.
• Recovery in the emerging markets will depend on the risk appetites of foreign investors.
• If things continue poorly in the US, I think that there are a number of places such as Eastern Europe that could become a really big problem, some parts of Asia and Latin America with large external deficits, would have major problems attracting funding.
• Outside of the BRICs where I spend most of my time, I’m very intrigued about Africa.
  • We have (Jacob) Zuma coming on the scene in South Africa, and that could be a very big issue. Zuma could do a Lula, and surprises people positively, that he’s not some kind of raving lunatic, keeps sensible economic policies and South Africa does better than people think.
  • Obviously Zimbabwe. That’s been a mess. Will that change, and if it does, that will be another source of positive surprise for the continent in general.
  • The last one, which is the biggest in many ways, Nigeria. People started to warm to Nigeria, the past couple of years. It ended up struggling, there seems to be perennial problems about certain areas of geography about Nigeria and the politics. If that carries on then Nigeria might become a source of disappointment. On the flipside of that, if you get the governance on side, then maybe Nigeria’s the place to look at.
  • I have a bit of my money in Africa, I wouldn’t put too much of my safe money there, but its the one that I’m most excited about in terms of where I’m willing to take risk.
• I think its time to take a bit of risk. We started by talking about how cautious people are, and that’s a good sign. Last year at the same time, there weren’t many people cautious, and when we got all the bad news we were all vulnerable to it. Now, people all over the world are scared, paranoid. Now, we’re going to climb a wall of worry, I suspect, so long as policy is helpful.

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BRICs Lay Foundation Stability: Merrill Lynch

Thursday, October 30th, 2008

Alex Patelis, Head of Global Economics, Merrill Lynch discusses the strength of BRIC (Brazil, Russia, India, China) countries in the midst of the global credit crisis, and how well suited they are to recover strongly. 

Patelis points out that close to 90% of global GDP growth will come from emerging markets economies in 2009, and goes one step further saying that he would not be surprised if global growth would come exclusively from emerging markets. They are underlevered, strong domestic economies, where consumption growth is being fuelled by income growth, and strong savings rates. In particular, he favours China and India.

Click image to watch video

Tags: Brazil, BRIC, BRICs, China, Consumption, Credit, Credit Crisis, Economics, Emerging Market, Emerging Markets, GDP, GDP Growth, India, Markets, risk, Russia, Savings Rate, Video
Posted in Credit Markets, Emerging Markets, Markets | No Comments »

Credit Crisis Observations

Tuesday, September 23rd, 2008

Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:

Loans and Mortgages are getting much harder to come by on average, globally.

This has bold and negative implications for property prices everywhere.

Observation # 1

It all began with housing and it will end with housing.

The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.

Observation# 2

Don’t trust central banks to always do the right thing.

Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.

In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.

Observation # 3

Policy mistakes are likely to be repeated.

The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.

Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.

Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.

Observation # 4

The golden era of investment banks is over.

The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.

Observation # 5

The final shoe hasn’t dropped yet.

There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.

Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.

Observation # 6

Leverage is ‘dead’ but capital is not.

Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will need to stabilize before we can expect better times.

Observation # 7

The end of the crisis looks further away than it did a year ago.

Its complicated, very complicated.

Commodity price induced inflation has made it hard for policy makers to reduce interest rates. Despite this, interest rate cuts may not be the magic bullet and in 20 of the 36 countries recently surveyed by Morgan Stanley, real short-term interest rates are currently negative.

At this point the $700-billion Treasury/Fed proposal appears to be a solid response, as does the stimulus injections of cash into markets around the world.

This problem remains possibly years away from being done with.

Observation # 8

Traditional risk management has lost its way.

Paul McCulley of Pimco touched on the subject in the July 2008 issue of Global Central Bank Focus:

“[...] every levered financial institution - banks and shadow banks alike - decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed.”

In fact, while it is known that PIMCO was regularly consulted by Secretary Paulson, it was Paul McCulley who rightly proposed in his newsletter during the summer, that the only real solution would consist of the formation of a new government agency to create a market to thaw frozen or cemented assets.  This would be the only viable long term solution.

Conclusion

Where is the opportunity? According to Absolute Return Partners, real value is to be found in credit instruments. This is where the most damage has been inflicted and it is where the biggest bargains are to be found in today’s markets.

What would you rather own? Equities which trade at 15-20 times earnings or credit instruments trading at a fraction of that cost? Deutsche Bank estimates that senior secured loans are trading at an implied PE ratio of 5-less than a third of the cost of equities.

You may read the full original version, at Observations on a Crisis, Courtesy John Mauldin

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