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.

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Rx for China: US Recession

Saturday, January 5th, 2008

Finally, The Economist has published a story, An Old Chinese Myth, which confirms the decoupling of Asia ex-Japan is actually real. A recession in the US is welcome in China, as it will help to moderate China’s growth at the margins, something that its macro-economic policy has not had much success in doing. In any event the article is a good read, and if you are investing in China, this is welcome news for you too.

An American downturn will cause China’s economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China’s growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing’s worries about the economy overheating, it would be welcome.

The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America’s total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China’s growth than it is of America’s.

With China’s true export-to-GDP ratio at under 10%, and NOT as high as the Headline exports-to-GDP ratio of 37%, a US slowdown would perhaps have the impact of an interest rate hike on the Chinese economy. This may just what the doctor ordered in China’s case. 

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BCA: Emerging Market Decoupling To Persist Into 2008

Thursday, January 3rd, 2008

BCA Research confirms its outlook on decoupling of emerging markets and the U.S. in its January 3, 2008 Bulletin:  

January 3, 2008 

Emerging markets have weathered the U.S. credit market calamity very well and the bull run will continue in 2008.

The economic decoupling between emerging economies and the U.S. is attributable to underlying fundamentals and is therefore sustainable. Unlike in the 1990s when emerging economies relied on foreign capital to finance their expansion, many of these countries are now net creditors in global financial markets and are not vulnerable to a withdrawal of financing by G7 banks.

Domestic interest rates are still very stimulative thanks to their strong currencies and vast savings, which will continue to underpin domestic demand growth. While exports to the U.S. have been slowing, trade among developing economies is booming.

As a result, overall emerging market growth will not slow considerably, even if the U.S. economic slump continues. Bottom line: Our Emerging Markets Strategy service recommends that investors continue to overweight emerging equity markets within a global portfolio.

BRIC Market Update and Research

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Posted in Credit Markets, Emerging Markets, Markets, Outlook | 1 Comment »