Interview with Jim O’Neill Chairman of Goldman Sachs Asset Management

Guest article written for AllAboutAlpha.com – the official publication of the  Chartered Alternative Investment Analyst (CAIA) Association

originally posted at: http://allaboutalpha.com/blog/2011/09/15/alpha-hunter-jim-oneill-gsams-man-of-brics/

With over US$714 billion under management, Goldman Sachs Asset Management (GSAM) ranks as one of the top 10 asset managers in the world.  At the helm is Jim O’Neill, one of the world’s most respected economists and market commentators who coined the term BRICs (referring to Brazil, Russia, India and China) in his prominent 2001 paper “The World Needs Better BRICs” and has been referred to as  “… the top foreign-exchange economist anywhere in the world in the past decade…“.  In this interview, we look at where the biggest opportunities and risks in the global market.

Q: What are your views on the investment opportunity presented by Emerging (BRIC) economies together with the Arab World?

Jim O’Neill: I think the strategic investment opportunity in the BRIC economies remains really big.  This decade, their GDP will increase by about $12 trillion, i.e. they will create another one of themselves!  More importantly, the share of consumption in this decade’s growth will be bigger and this is where the big opportunity lies.  I am especially optimistic about the Chinese consumer.  All BRIC markets are currently reasonably valued, but I prefer China the most, followed by Russia, then Brazil and India.  But the BRIC’s remain the biggest economic and investment theme out there.  As far as other so called emerging markets are concerned, I focus on 2 groups, one the so-called “next 11” or N-11, which are the largest populated countries after the four BRIC countries, and the “growth economies” as I call them, which are the 4 BRIC countries plus 4 of the N-11; Indonesia, Korea, Mexico and Turkey.  Within the N-11, I am quite excited about some others which would include Nigeria.  Egypt and Iran are both part of the N-11 and of course, have many challenges, but probably ones to keep an eye on.

Q: What are your views on the investment opportunities presented by the US, UK & Euro-Zone economies?

Jim O’Neill: The biggest opportunities relates to the branded companies who are excellent at exploring opportunities in the BRIC and N-11 world, especially those with a consumer brand that is difficult to replicate and compete with, for example German cars, Louis Vuitton.  The domestic opportunities in the Euro Zone and US Economies are more difficult to get excited about as their own domestic growth is likely to be restrained for a couple of years.  That being said, the recent equity market weakness suggests that at some stage opportunities in many sectors can be explored.  I do worry about the stability (or lack of it) of the European Monetary Union.  I think the 2008-2011 era has demonstrated that there are major problems with the structure and governance of the EMU and there is need for considerable change, probably more fiscal and political union, of which a common Euro denominated bond will be part of.  This is obviously not easy to achieve politically and the path ahead will be fraught with problems and challenges.

Q: What are your views on interest rates & inflation in US & Euro Zone?

Jim O’Neill: I don’t really have a hugely strong view.  I don’t see major inflation or deflation.  I think the forces of delivering are so strong that strong monetary expansion is not likely to lead to inflation any time soon, and at the same time, I think central banks are aggressive enough to stop deflation.  With the fed having recently told us that short term interest rates will remain where they are until 2013, this is  a big anchor for interest rates, short and long term in the US and Euro Area.  I do think that the ECB probably made a mistake raising interest rates and will reverse them.

Q: Where do you see the key risks for investors in global markets?

Jim O’Neill: I think the biggest risk is the situation with the EMU as I have explained.  I can see that this has the potential to derail the world economy in the same way the 2008 credit crisis did.  I do not worry about the US as much as many and I suspect there is a risk that the US might end up doing better than many of us currently think.  The absolute biggest risk out there I can identify would be if something went really wrong with China as it is so important to the BRIC and global economic future.  Luckily, I think it is a small risk.

What does this mean for investors?

Mr. O’Neill underlines the two largest elephants in the room.  Firstly the long-term viability (or lack thereof) of the ‘developed world’ economies status-quo, and secondly the economic potential of the BRICs.

In a 2011 interview I conducted with Nobel Prize Winning Economist Edmund Phelps he stated (of ‘western’ economies), “…business investment activity is going to be weak ten years from now… and is weak already in anticipation of that. The decade beginning around 2020 will not be a good time for capitalism.“.  This can be contrasted against a country like Brazil which has grown from a GDP of $15.1 billion in 1960 to almost $1.6 trillion today by having a hugely dynamic economy which (to quote Brazilian Minister of Defense, Celso  Amorim in his 2011 interview with me)  insists on having “… growth alongside stability….”

For investors, therefore, the opportunity is clear… To build wealth, and stability, we have to invest in BRICs.


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