PLANNING TO PUT GROWTH MARKET EXPOSURE IN YOUR EASTER BASKET?

While getting some well earned rest over the Easter holiday break, I bet many of you are thinking still about whether you have exposure to the right set of forces that are shaping our world – in particular the Growth Market world of the BRIC economies and some of the so-called Next 11. Since we hosted our inaugural Growth Market Summit, I have certainly had a number of follow-up discussions with investors about whether they are thinking about the future in the right way.

Over the past week or so, I’ve heard more remarkable anecdotes about developments in many of these countries.  And, I’ve observed more powerful published data.

THE BRIC SUMMIT.

Just before last week, the leaders of the BRIC countries – also including South Africa – met.  At first, I thought the communiqué hinted at a rather bland affair.  But then, when I picked up a bit more about their meeting, one area that is emerging for genuine cooperation is the expanded use of their currencies for bilateral trade. It looks as though previous discussions were continued and a number of specific areas are being pursued. Each of their main Development Banks is considering the use of other BRIC currencies for bilateral projects.

Their meeting came on the heels of my recent trip to Nanjing and the G20 high level summit. If you recall, I summarized my thoughts from that meeting by suggesting that the possible broader use of the Special Drawing Right (SDR) and the inclusion of the CNY and possibly the RUR was the highlight of the meeting. I now find my mind wondering whether it is conceivable that, some time in this decade, all 4 of the BRICs would be included in the SDR.

Tangential to this, I came across an interesting article published in China about the possible development of a BRIC currency, in which the “BRIC” would be a shared currency used by each of the four currencies. Now, given how tough it is to share a currency – just look at the Euro Area -- and given the immense differences that exist between the BRIC economies, I can never see this happening. But I can see all 4 of them becoming part of a more representative SDR.

THE S+P WARNING ABOUT US TREASURIES.

Early last week, S+P announced that they had decided that unless the US introduced a more credible deficit-cutting package, they would remove their AAA rating. I think this threat came at a time when policy is shifting dramatically in the US anyhow and, at the margin, the publicity surrounding this news might make it more likely. However, against the background of the above, it might also, at the margin, encourage people to think about alternative reserve currency choices to the Dollar as well as their exposure to the Growth Markets, including their role in future benchmarks.

THE CHINESE ECONOMY AND POLICIES.

Away from the BRIC political group, this week was one with major Chinese data releases and, to my surprise, virtually all the data surprised on the upside. It was also a week in which the authorities appeared to accelerate the pace of RMB appreciation. These two things are probably interlinked.

Despite some tightening of financial conditions, it now seems as though the evidence of a slowing economy that surfaced a couple of months ago might have been temporary. Retail sales recovered sharply in March to 17.4 pct, for example, and both fixed investment and industrial production (IP) were above expectations also. Encouragingly for those of us that believe China is making some structural adjustment, the pace of retail sales growth to IP also appears to be accelerating. This is consistent with the lower external surplus.

Both CPI and PPI accelerated also, with the rise in consumer prices at 5.4 pct, well above the 4 pct implicit target that the central bank has set.

It appears as though key policymakers might have concluded – as many have warned for a long time – that unless the RMB is allowed to both move more and appreciate at a faster pace, then achieving a softer landing will be difficult. A number of policy- related people made comments consistent with this tone last week, and even the PBOC Governor, Zhou, suggested that foreign exchange reserves need to be reduced.

Of course, extrapolating last week into the future might be dangerous, as there could be some other temporary unexplainable reason for the stepped up pace of RMB appreciation. It was interesting to read about the strikes over rising fuel prices at the Shanghai ports, and of course, a little ironic that the RMB appreciation has stepped up with this going on. With this caveat, it seems odd to me that the markets have still not adjusted for an annual pace of 5 pct or so over the next year.

In any case, regardless of the pace of the appreciation, last week’s China news against the background of the S+P news, along with the BRIC meeting and recent G20 developments, should get global investors searching more about the future.

RUSSIAN ECONOMIC POLICIES.

Last week also saw some extremely interesting comments from Russian Prime Minister Putin. Many observers are increasingly watching any comments from either Putin or Medvedev for clues as to which is going to stand for President in 2012 – or indeed whether they might both stand against each other. This is going to be critical for Russia over the next few years. Amongst his broad ranging comments, Putin outlined policy hopes for Russia’s economy and demographics. He repeated that a goal for Russia was to become one of the top 5 economies in the world by 2020 (not a new goal). He suggested that productivity would need to double in order to achieve this, while also saying that they should avoid liberal experiments. Of most interest, however, was that he said the authorities were spending RUR 1.5 trillion in an effort to boost the birth rate in the country by 25-30 pct by 2015 over 2006 levels. He also cited a hope that life expectancy was on the rise and that it would reach 71 by 2015.

Achieving better demographics are probably the most important goal for Russian policymakers, and these developments are important for (skeptical) investors to watch. For a sanity check, I asked Clemens Grafe, the GS Russian expert for his views about Putin’s comments. Clemens confirmed what I hear from academics that study Russian demographics closely. He said that life expectancy has already risen from 65 to 69 between 2005 and 2010, and that the birth rate is already 20 pct up from 2006.

I continue to think that Russia is probably the most attractively priced of the BRIC equity markets today, because it is both cheap and marginal policy developments are much more positive than most people recognize.  

BRAZIL RAISING INVESTMENT IN THE INTERNET.

Saturday’s FT discusses plans by Brazil to boost spending on the availability of the internet in the country. The article discusses the considerable growth opportunity seen by Google as a result, with their local CEO talking of an 80pct rise in revenues and a doubling of their headcount. This is typical of the sort of opportunities in so many different areas in the BRIC and other Growth Markets.

INDONESIA GETTING ON THE MAP.

A delegation of Indonesia policymakers visited London again last week to tell the world about their improving story. I attended a reception they hosted as well as received a visit from them. They tried to tell me once again why the “R” in BRIC should be replaced with another “I”, for Indonesia, or it should be expanded to BRICI.  As is well known, Indonesia has very favourable demographics, and if the future was purely down to this, then their case would be overwhelming. Their confidence is rising due to the experience from presiding over an improving cycle of stronger growth, reasonably stable inflation and rising wealth and aspirations of their citizens. By the middle of the decade, they told me that it is possible that their growth rate will rise to 9 pct. We ended up having a most interesting discussion. I suggested that I would be impressed with them maintaining the current 6 pct-ish rate for the decade if it was accompanied by steady inflation.

What was clear to me from this conversation is that Indonesia is certainly one of the “Next 11” countries that should be thought about somewhat differently that the past. I heard ample justification as to why we include it as one of our Growth Markets, along with Korea, Mexico and Turkey and the four BRIC countries.

Getting more exposure to all of them is an appropriate challenge facing all of us today and in the future.

Enjoy a restful long Easter weekend, although for many of us football fans, it will be anything but restful.

Jim O’Neill
Chairman, Goldman Sachs Asset Management