Stocktake: O’Neill plays the letters game
Former Goldman Sachs economist Jim O’Neill
Former Goldman Sachs economist Jim O’Neill, who popularised the Brics (Brazil, Russia, India, China) as an investment concept, is now making the case for Mint (Mexico, Indonesia, Nigeria, Turkey).
O’Neill, who once joked he didn’t want to be remembered as “the guy that just constantly created acronyms”, had previously talked of the Mist economies (same as Mint, except for South Korea instead of Nigeria).
He was also involved in Goldman’s gimmicky-sounding Next 11 fund (the next 11 emerging economies).
O’Neill is not alone. Citigroup came up with the Carbs (Canada, Australia, Russia, Brazil, South Africa); Blackrock introduced the Cassh economies (Canada, Australia, Singapore, Switzerland, and Hong Kong).
Others made the case for the Ticks (Taiwan, Israel, Chile, Korea).
Then there are the Civets – Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa – named after the Indonesian cat-like animals that eat coffee cherries and then egest them.
Civet coffee is famously expensive, due to high demand among westerners attracted by the colourful story.
Coffee geeks will tell you the coffee is mediocre and over-hyped.
The same could be said of the Brics (“bloody ridiculous investment concept”, said Société Générale’s Albert Edwards), and investment acronyms in general.
Consensus expectations are already priced in
The main problem with such concepts is there is little correlation between GDP growth and stock prices, as a recent Vanguard report confirmed. The report, which examined long-term market returns and GDP growth in 46 countries, found real equity returns averaged 4 per cent annually in the countries with the three highest GDP growth rates, compared to 4.2 per cent for the countries with the lowest GDP growth rates. The economic high-fliers, despite growing five times faster (8 per cent compared to 1.6 per cent), proved poorer investments.
Why? Mainly because consensus expectations are already priced into equities. Unexpected growth can drive equity gains, but predicting growth surprises, the paper notes, “is very hard to do”. Investors “should avoid making portfolio decisions based on their expectations for a particular country’s or region’s economic prospects”.
All-time US highs create ‘reluctant bulls’
US equities may be at all-time highs and global stocks at six-year peaks, but there’s no exuberance among investors, according to Merrill Lynch’s latest monthly fund manager survey.
More than two-thirds regard US stocks, which have soared 25 per cent in 2013, as expensive. More than half see global indices (up 20 per cent) as expensive – the first over-valued verdict in almost 10 years.