Thursday, December 1, 2011

Société Générale's Albert Edwards Huffs and Puffs on BRIC House (Dec. 1, 2011)

While Goldman's Jim O'Neill says "Not by the hair of my chinny chin chin".

First up, ZeroHedge:
Albert Edwards On The BRICs As A "Bloody Ridiculous Investment Concept"... And A China Hard Landing
Just in time for the Chinese 50 bps RRR cut, we get a note from Albert Edwards reminding us just why this desperate and sudden move from China comes: "We have identified a China hard landing as one of the biggest investment shocks next year." Not only that, but the SocGen strategist takes a long overdue swipe at the world's most ridiculous concept, Jim O'Neill's BRIC debacle: "Despite recent poor  performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym - Bloody Ridiculous Investment Concept." It appears that the PBOC was well aware of this re-definition when it decided to announce to the world that it has started easning once again last night.
Why the feud with the BRICS?
Eurozone equity markets have suffered badly this year amid the crisis that has engulfed the region. Speaking to clients, they still retain a preference for the rapidly growing emerging markets (EM) against the highly indebted and struggling developed economies. Yet, much to many investors' surprise, EM, and especially the so-called BRIC equity markets (Brazil, Russia, India and China), have performed even more poorly (see chart below).

Despite recent poor performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym - Bloody Ridiculous Investment Concept.

As my former colleague James Montier always used to point out, investors are suckers for a good story. When you look at the evidence, there is absolutely no correlation between investment returns and economic growth because investors overpay for growth stories and there is no margin for error (see Dimson, Marsh and Staunton at the London Business School 2005 - link). In addition, The Economist magazine reports that Paul Marson of Lombard Odier has extended this research to emerging markets. He found no correlation between GDP growth and stock market returns in developing countries over the period 1976-2005. A classic example is China; average nominal GDP growth since 1993 has been 15.6%, the compound stock market return over the same period has been minus 3.3%. (link)

From Livemint:

Jim O’Neill continues to bank on BRIC economies

Mumbai: It’s been 10 years since Jim O’Neill coined the term BRIC to describe the world’s four fastest growing economies—Brazil, Russia, India and China; South Africa was added to this list subsequently. The BRIC usage gained wider currency in 2003 following the publication of a Goldman Sachs paper by Dominic Wilson and Roopa Purushothaman.

While world growth shutters with countries such as India and China seeing a possible hard landing, O’Neill, chairman of Goldman Sachs Asset Management, continues to bank on the group’s economies.
“In the decade ahead, the BRIC countries will probably create at least another one of their current self, i.e., grow by around $12-13 trillion in nominal dollar terms, assuming that they grow at somewhat softer rates,” O’Neill said in a note marking the 10th anniversary of the acronym’s coinage.

Ahmed Raza Khan/Mint
Ahmed Raza Khan/Mint

The Indian economy grew 6.9% in the second quarter, slipping below 7% for the first time since 2009. Several economists estimate growth for the fiscal year will drop below 7% in fiscal 2013 due to high inflation, monetary tightening, retreating foreign capital and slowing investment.

China’s gross domestic product (GDP) growth slowed to 9.1% in the second quarter compared with close to double-digit growth in 2010. Brazil grew 3.1% year-on-year as of June, while Russia expanded 4.1% as of December 2010 after showing negative growth in the previous year.

While the world’s two fastest growing major economies are slowing, O’Neill is more optimistic about India....MORE