DOES FIFA UNDERSTAND MORE THAN THE REST OF US?
 
Apologies in advance, dear reader. As you know, I don’t like to miss the opportunity to talk about either football or the world economy. When I can link the two of them together, even better! So, when FIFA made the decision to award the 2018 World Cup to Russia and the 2022 World cup to Qatar, this presented quite an opportunity for me. 
Here in the UK, there is a mood of shock and anger about Russia being chosen since there was great hope that the World Cup would come to England. Needless to say, there are plenty of accusations of all sorts of underhand tactics that may or may not be true. But I believe that there is a more simple explanation. Despite the likelihood that the technicality of the English big being more superior (and perhaps the same for Australia and the USA for 2022), football is the world’s most popular sport and it is something that connects many of the poorest people and economies.  It is a truly global sport.  If the world is developing to include the world’s historically less well-off nations, then what better way of trying to support and guide it?
 
If you attended our May 2010 BRIC conference in London and witnessed my interview with Russian First Deputy Minister, Mr. Shuvalov, you would not have been surprised by FIFA’s 2018 decision. I certainly wasn’t.
 
Anyhow, regardless of its merits, the decision has been made. It now means that the two World Cups of this decade, 2014 and 2018, are going to be held in BRIC countries. As I joked with many people on Friday:  it is a good thing that China and India aren’t yet interested, or it might not return to Europe until after 2030.
 
RUSSIA AS A BRIC.
 
Yesterday, I received yet another email about why I should supposedly consider dropping the R in BRIC. Talk about bad timing!  Before I relate it to the above, let me re-iterate 3 simple points on Russia’s position as a BRIC. One, until the sharp economic contraction of 2009, the degree of positive GDP surprise since 2001-03 in Russia was higher than all of the other BRICs. Even taking 2009 into consideration, the aggregate performance over the decade was almost exactly as we had assumed. Two, Russia is twice the size of Indonesia in US$ terms, the country that yesterday’s email sender suggested should replace it. Three, while there are eye- catching obvious factors, corruption included, as to why there is so much negative feeling about Russia, if you look at objective indicators that one should monitor for economic development and sustainable growth, Russia is not the weakest of the BRICs. GS produces Growth Environment Scores (GES) every year, which are an index of 13 subcomponents, the aggregate level varying from 0 to 10, with 10 being the best. The Economics Department is due to present its 2010 scores (for close to 180 countries).  In 2009, India had the lowest score of the four BRIC countries. Brazil was highest, followed closely by China, which in turn was followed closely by Russia.
 
Now let’s think about the future. The infamous GS 2050 GDP projections, in which the four BRICs straddle the US to be the five largest economies of the world, are based on productivity and demographics. For Russia,  it was assumed, as have many, that its working population is going to decline dramatically. When I interviewed Shuvalov in May, in addition to his fervor for the World Cup, the other striking takeaway was a statement that male life expectancy in Russia is on the rise. While many experts would not share the degree of change he believes has already been achieved, most would suggest that the circumstances in Russia are changing. If this is the case, Russian demographics might not turn out quite as badly as we all assume.
 
Let’s now think World Cup 2018. As anyone who has visited St. Petersburg will know, Russia’s airports are in need of an overhaul. What is better than to be responsible for staging the world’s greatest football tournament, and having 7-8 years in which to prepare? Along with recent signs from both Medvedev and Putin that they are eager to diversify the economy away from excessive dependency on natural resources, and of course, to adopt a much stronger credible internationally accepted rule of corporate law, Friday’s announcement could be extremely important.
 
It is all especially interesting as Russian equities are ending 2010 as they started – with its market heavily discounting the popular dislike of Russia. Expressed more positively, Russian equity is cheap.
 
THE BRIC AND N11 CONSUMER.
 
By coincidence, but to celebrate FIFA’s decision, yesterday, Anna Stupnytska and myself published the second paper of our Strategy Series, entitled “The Rise of the BRICs and N11 consumer”.  As I mentioned in an email that accompanied its publication, it is probably the most important global economic subject of the decade.
 
A vast majority of people believe that the world is going to struggle without the powerful growth engine that the US consumer has provided for the past 20 plus years, and doubt that the world economy can sustain the post-crisis recovery.  Due to my faith in all the BRICs, not only did I confidently believe that the world economy would recover quite easily -- helped by aggressively friendly monetary policies – but I continue to believe that the world will keep on surprising  people in the coming years. Anna and I explain in more detail what the role of the BRIC and some key, so-called N11 consumers may be in the future.
 
In the paper, we show that it is quite likely that in the next 10-15 years, the aggregate $ value of the BRIC consumer will become as big as that of the US. Indeed, if China succeeds in raising the share of its consumer in its economy – something that the next 5-year plan appears to be focused on – then China alone might match the US consumer in that time period.
 
Amongst the N11 countries, we find that Indonesia, Mexico and Turkey have the individual capability of becoming globally relevant consumers in the same timeframe.
 
If our analysis is vaguely right, then the consumption activities of the BRIC countries and the N11 will increasingly become the key marginal players in a whole variety of consumer businesses, certainly including consumer durables, luxury goods, travel and tourism. As one reader has already remarked to me, surely it will be true in virtually any industry? To which I replied that he was probably correct.
 
Watching progress of consumer spending in these economies is absolutely essential to the world economy in 2011 and beyond.
 
PERIPHERAL BONDS IN EUROPE AND EM BONDS.
 
A couple of graphs I have seen from colleagues of mine at GSAM recently have really stuck in my mind. Iain Lindsay, one of our Fixed Income team members, spoke at a Swiss client event the week before last, along with some others. One of his charts showed remarkably low yield environment for the total fixed income universe, in which I think it suggested that only 14 pct of the universe had yields above 4 pct.
 
Another graph that caught my attention this week was when Sam Finkelstein, who runs EM for GSAM, sent me a chart of the highest 5-year CDs spreads. Amongst the10 highest were five, yes, five members of European Monetary Union.
 
This prompted me to rudely joke that we have found a solution for the EMU debt crisis. Simply re-denominate the Club Med countries and Irish bonds into an “EM portfolio” and they will sell like hot cakes.
 
When I stopped to ponder all of these bits of anecdotes, it suggests to me that it might not be a bad idea to look through the mist, confusion, and uncertainty surrounding which European policymaker says what, and each forthcoming twist and turn, and in your Santa stockings, put a basket of Club Med bonds for 2011.  As I mentioned last week, I am not sure how the crisis plays out, but I am reasonably confident that it will.
 
As The Economist describes the EMU situation, consistent with what I discussed two weeks ago, it is clear that not all members should have joined EMU. It is far from clear that it follows they should now leave; indeed it quite unclear. Moreover, as the Financial Times mentioned Friday, when you have someone as experienced as ECB President Trichet involved, you might want to choose your poker players carefully. His hints this week of more aggressive ECB bond market involvement, followed by his noncommittal stance at his press conference, were rather masterful.
 
A FINAL WORD, AT LEAST FOR THIS WEEK, ON 2011.
 
As we have moved into December, many forecasters are unveiling their projections for next year and beyond. My old colleagues in GS Economics, Strategy and Commodities introduced their forecast last Wednesday, including a notable upward revision to their forecast for the US. For now at least, the new US GDP forecast for 2011 at 2.7 pct appears to be above consensus of 2.4 pct. This is the first such time for many years. This is very consistent with my own judgment. Other more cautious forecasters will be relieved by Friday’s disappointing November payrolls, but I have strong suspicions that this data will be revised better. It is inconsistent with other reliable evidence recently, and I would expect more upward revisions as we move towards year end, and not just for the US. The ongoing evidence for the UK economy continues to be much more optimistic than the consensus.  As more forecasters complete their outlooks, I suspect the consensus for world GDP will creep upwards towards 4.5 pct from around 4.1 pct currently. I personally believe that 5 pct global GDP growth is feasible in the next two years. In line with this, current dividend yields and extremely low real bond yields, it continues to seem to me that the bull market in global equities that started in early 2009 has got plenty of legs left. The current equity risk premia is simply too high. 
 
 Jim O’Neill
Chairman, Goldman Sachs Asset Management