Former Chief Economist of Goldman Sachs Jim O’Neill (2001-2011), who famously coined the “BRIC” acronym that the world now uses to refer to Brazil, Russia, India and China, recently spoke to us and weighed in on the new external forces swirling around the world’s emerging economies.
All is not lost in regions such as Latin America, despite ongoing and escalating chaos in places like Venezuela, but O’Neill does admit that “Argentina has got its own problems.” According to O’Neill, the past six to nine months have clearly demonstrated that we live in a world where the U.S. dollar financial markets are more important than ever and for this to have even a chance of changing, other markets must work to develop. “Too many of these emerging countries didn’t reform during the easy times,” he says.
A survey published in March by Frankfurt-based behavioral finance firm sentix GmbH shows that investor sentiment in emerging market equities is nearing a significant and even historically low point, just one notch above its all-time low recorded just after the collapse of investment bank Lehman Brothers in 2008. The data shows the fifth consecutive decline for sentix’s Emerging Markets Equity Sentiment index, which is surveyed on a monthly basis and since April 2007 has been part of the sentix Asset Class Sentiment survey which is typically conducted around the second Friday of each month.
As geopolitics play more and more into the direction which financial markets may turn, O’Neill notes in a March column for Bloomberg View that “China has successfully moved toward more balanced trade while managing its currency more closely than many would have liked.” Not too far on the map is the ongoing standoff between Russia and its seizure of Ukraine’s Crimea territory and the growing number of nations who have deemed Putin’s moves a violation of international laws. He writes: “Russia’s actions in Ukraine have prompted the idea that it should be kicked out of the Group of Eight (G8). Maybe that place should be offered to China instead.”
This is an edited version of our conversation with O’Neill.
As we enter the second quarter of 2014, what can we expect from the emerging and frontier market nations?
The issue that faces them all, if you can think of them all as one, is the new external forces. One is the new China, and the other the Federal Reserve in the U.S. and how it proceeds with pulling back from quantitative easing and a return to “normal.” Unless the fundamentals of a particular nation are strong, you are vulnerable to external forces, as we have seen in the first quarter. There are a lot of elections scheduled across emerging nations in the second quarter onwards.
Is the worst over for the emerging market economies in regards to currency and equity declines?
Maybe, or maybe not. Not really easy to predict at this point in the cycle.
Should investors be paying more attention to the MINT nations and if so, why?
Yes. Mexico and others are all different places. But after the BRIC’s, these are the four: Mexico, Indonesia, Nigeria and Turkey, are set to really change the world. Large, young, growing and eager populations cannot really be taken for granted within the emerging markets.
Has negative sentiment on emerging markets been a big enough factor to hinder a turnaround within emerging markets?
No, not particularly when it comes to Indonesia and even India. These are two markets that have hit record high, while others continue to struggle. Now many see that you cannot get by and get away on the back of positive external factors forever.
If there’s a post-referendum final resolution to the standoff between Russia and Ukraine, how much potential exists for there to be long term effects on world markets?
It could mean a huge rally in Eastern European equities.