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 4th 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.
