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May 10, 2013, 06.01 PM IST | Source: CNBC-TV18

BRIC story not over yet; current lull cyclical: Jim O'Neill

Brazil, Russia, India, China may be facing slowdown at the moment but growth story of these countries is still intact, giving best long term investment opportunities, says Jim O'Neil.

Jim O'Neill

Former Chairman, Goldman Sachs

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Jim O’Neill, the man who coined the term BRIC (Brazil, Russia, India, China), believes that growth story of these countries, which global investors savored for over a decade, is not over yet and the current slowdown is just cyclical. 

There has been a lot of disappointment and disenchantment about how the BRIC economies and the BRIC markets are doing. BRIC funds have lost a lot of their assets under management (AUM).

British economist and former chairman of Goldman Sachs Asset Management O’Neill said that some kind of slowdown was expected from these countries as they had grown much faster then anticipated.

At one point of time in past decade China and India were trading at premium on forward price to earnings (P/E) ratio to all the developed markets. “Once you get to that kind of degree of herd mentality, some of the enthusiasm is gone… Now because there is some cyclical economic disappointment, people are giving up hope,” he said.

Explaining his pecking order among BRIC countries O’Neill said that from economy growth point of view he preferred China followed by India Brazil both at second place and Russia at third; in terms of market his priority was Russia due to its cheap valuation.

“I have been looking at markets for thirty odd years and one has to always remember valuations and the valuations of these markets today are the most attractive than they have been for many years. So not at all when I think over the next few years investing in the BRIC countries is again very attractive thing to do,” O’Neil said.

Below is verbatim transcript of O’Neil’s conversation with CNBC-TV18 managing editor Udayan Mukherjee.

Q: This year has not been the best of years for the BRIC, so let me start by asking you about that, why is this disenchantment which has started creeping in about the BRIC markets?

A: First of all I think you do have to distinguish between the BRIC markets and the BRIC economies. Markets and economies do not always go exactly hand in hand.

Secondly, despite that of course the last decade was fantastic for both the BRIC economies and the BRIC markets with the performance of economic growth and the markets vastly surpassing even what I thought. So they have sort of set themselves a very high hurdle. So in some ways, some kind of a slowdown and relative disappointment performance wise compared to the past decade was sort of always going to happen.

Economically China, even though it has slowed, it is doing better than I had assumed for this decade whereas the other three are all doing different degrees of underperformance. That is different than other markets because of course China as an equity market has disappointed the others even though economically, I would argue it is doing better.

Then I think you have to look at each individual country to see what is going on particularly on the economy but to some extent on the markets too.

Q: Do you think global investors are losing interest in the BRICs as a theme perhaps because of China’s slowdown and how poorly Brazil and Russia have done as well?

A: Definitely. Goldman Sachs’ manager who just recently retired has both the BRICs and Next 11 Equity Fund. In the past twelve months, we have seen a lot more flows into the N-11 Fund than the BRICs fund. I think it is representative of broader behaviour of investors. To be honest, it shows not for the first time in my life but many investors, even cautious passive ones are very momentum driven. The fact that the story has lost some of its acceleration and as you touched on in some cases particularly in Brazil and India it had some disappointments, people have lost interest.

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Q: How would you rank them now if you had to choose your pecking order in the BRIC, what would it be?

A: Let me just say one of the things before I do that because even though they have lost the fascination of the markets, economically, what is going on with the BRIC countries is still the biggest thing of this generation. I am fond of saying to people that China creates another Greece every twelve and a half weeks, another Cyprus every week, another Spain every year. Actually in the past two years China has created another India. So China on its own is quite remarkable and we do not have the full data to compare yet but for 2011, the BRIC countries created between them another Italy in one year and by 2015, the four then collectively will be bigger than the US. So, we need to keep all of this in perspective.

Q: Your pecking order?

A: My pecking order I think economically I would have China as number one, because I think it is adjusting very well. It would be a close tussle between India and Brazil as number two and then Russia last number four. Not the same in markets. In terms of markets, I would have Russia number one because it is very cheap. China number two, Brazil number three and India number four. Although all four of them, the way I look at things are now quite cheap and countries of what you said I think for the true forward looking investor over the next five years, this is a fantastic time to be investing in the BRIC markets.

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READ MORE ON  BRIC, investment, FII, global markets

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