Developed mkts may outperform BRIC in 2011: Goldman Sachs

Markets, globally, have been a tad turbulent since the beginning of the year. However, in comparison to Brazil, Russia, India and China (BRIC), US markets has outperformed over the past three months.

And, this trend, according to Jim O'Neil of Goldman Sachs, is likely to continue during the year. "Developed markets may perform better in 2011, while BRIC markets are likely to underperform; this, on the back of worries of inflation. We need clarity about policies to tackle inflation in India." Below is a verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. For complete details watch the accompanying videos. Q: The view seems to be that this year is going to go towards the developed economies rather than markets like ours. Would you go with that? A: For 2011, specifically as a year, it might well be that the more developed markets perform better. My own personal big call for the year is that the US is going to positively surprise. If that is right, you will see US markets as they have done for the past three months, outperforming the rest of the world and certainly outperforming some of the BRIC markets, including your own. On top of that, some of the BRIC markets in the short-term, India included but also China and elsewhere have got problems about inflation. As much as I believe in the long-term story, I think for this year the BRIC markets might actually underperform for awhile Q: How prolonged could that underperformance be and do you think its inflation alone which is pegging back investor interest and making them cautious in the near-term in markets like India and China? A: People are worried about inflation. It is not obvious in India as it is in China where it is clearer. It is not obvious where the Indian policymakers are so people are worried about what kind of inflation level will be tolerated and how aggressive the Indian policymakers are going to be. Importantly, it is against the background of the Indian markets doing so well in the past 12 months that the Indian market is not really cheap either. Seeing from a longer-term perspective, I do not think it is necessarily a bad thing. Last year, there was a lot of money flying into the emerging market debt and equity and all sorts of emerging asset classes, on the back of people being very negative about the Fed and expecting US interest rates to go down. With the mood about the US changing you are going to have some of that money exiting and that is what we are really seeing. It is an issue for the next few weeks but in the big picture, it is almost a healthy development, nothing ever goes in a straight line, certainly not good things. Q: If your call is that S&P outperforms the Sensex big time in 2011, how stark could that outperformance be? What kind of levels would you work with as targets for the S&P by the end of the year? A: We are going to go up another 200 points. By the end of the year, there is a good chance the S&P could be at 1,500. The US market looks cheap, there is a lot of momentum and there are a lot of positive changes taking place in the economic data. I think we look set for an extended rise in the US market, so I feel very good about it. Q: Where does all this leave the commodity universe though? There was a big rally and now some tempering in assets like crude. Where do you see commodities performing? A: I think the commodity markets are sort of stuck between two big opposite poles. Structurally, the improvement of the world economy and the growing importance of the BRIC countries is essentially bullish, but in the near-term you have got the most important emerging countries, China and India at the forefront but also Brazil and others, China tightening policies and slowing the economy down. On top of it, they are trying to do things to boost the energy efficiency and alternative energies. I think the commodity market outlook is a little more balanced. I am not as bullish as many other people talking about it. _PAGEBREAK_ Q: You are part of the group who came up with the idea of a BRIC market to invest in. Is that changing a bit? Should India and China not be counted as emerging markets anymore? A: I am trying to change that and this is the report you made reference of which some of the international media have focused on today. I will give you a very specific anecdote to India. Late last week, one of your rapidly rising new airline company