The markets are currently a fast-changing place. Here, experts give their take on how to manage money in an environment shaped by the deficits of the “rich” worldby Jim O Neill / August 24, 2011 / Leave a comment
Published in September 2011 issue of Prospect Magazine
In view of the considerable fiscal challenges facing both Europe and the US, it is not surprising that investors are searching for alternatives. In addition to providing much better potential for long-term real gross domestic product growth, those countries that I refer to as Growth Economies—the four BRICs, Brazil, Russia, India and China, along with Korea, Indonesia, Mexico and Turkey—all have dramatically better fiscal positions and considerably lower government debt.
One way of thinking about it would be in terms of the Maastricht Treaty, which before 1999 was supposed to determine countries’ fitness for membership of the European Monetary Union. Countries were only allowed to join if they had budget deficits at or below 3 per cent of GDP and government debts that were 60 per cent of GDP or less, or were heading in that direction.
Right now, Finland would be the only eurozone country to meet the Maastricht criteria. Britain, the US and, of course, Japan certainly do not. Among developed world nations only Australia and Sweden would sit alongside Finland.
By contrast, all of the Growth Economies, with the possible exceptions of India and Russia, would easily satisfy the Maastricht criteria. Now that the credit rating agencies have noticed these issues, it is quite likely that more and more investors will want to diversify gradually away to these markets.
Jim O’Neill is chairman of Goldman Sachs Asset Management
Blue chip stocks
Markets are dominated by trouble arising from sovereign debt and there is uncertainty around both the impact of this and the global macroeconomic backdrop.
Outside the financial sector most companies are concerned by the threat of weakening demand. Profit warnings have increased recently and trading has become more difficult. Corporate balance sheets have strengthened, however, which has provided some comfort.
In our view, this environment is better for “blue chip” stocks—those of large, respected companies—than it is for the smaller “mid-caps,” which are more sensitive to the cyclical motions of the market.