The former chairman of Goldman Sachs Asset Management retired in April last year, but hasn’t given up actively investing. His latest bet was on a mobile-payment company in Nigeria, but he’s also up for shorting the euro and playing the Chinese consumer. Or how about taking a closer look at previously struggling southern European countries, such as Spain and Greece?
Jim O’Neill: Short the euro, go for China, Nigeria
China is still the champ, and that means buying consumer-related stocks, while Nigerian tech companies could be the next big thing, said economist Jim O’Neill. He also explains why he is keen on investing in emerging markets, but is keeping his distance from Russia for now.
“I’m very interested in the interplay between technology and Africa. And that’s why I made this investment in Nigeria. That’s probably the last sizeable investment I’ve made,” O’Neill said in an interview on Thursday. “I’ve spend more time in Nigeria in the past 12 months than in any other country in the world outside of Europe. Maybe I’m a bit insane.”
O’Neill coined the term “BRIC” in 2001 as shorthand for the four big nations — Brazil, Russia, India and China — poised to challenge the West’s economic dominance. In 2013, he followed up with “MINT” — Mexico, Indonesia, Nigeria and Turkey — to describe the next group with interesting demographics and investment potential.
At age 57, he now chairs the U.K. Cities Growth Commission and is a visiting research fellow at the Brussels-based think tank Bruegel. While the only thing keeping O’Neill awake at night is Manchester United — his favorite soccer team — he still follows investing trends. Read on for more.
MarketWatch: Emerging markets got off to a rough start in the beginning of the year, but many actually ended up outperforming the U.S. and Europe in the first quarter. Do you think this trend will continue?
O’Neill: I have no idea, but my suspicion is yes. All that January told me, was that the mood had become almost one of frenzy as to how bad emerging markets were going to be. Which is usually a reverse indicator. And so far, that looks like that’s been the case again.
Secondly, the valuations in EM are so attractive relative to the structural story and relative to the developed world. So, if you believe in the structural EM theme, you should be praying for moments when the mass psychology of markets doesn’t want to invest in it. Because all that it tells you, is that all the idiots are getting out.
MarketWatch: Where are some of the best investment opportunities right now?
O’Neill: I believe in investing in favor of China and the Chinese consumer. One of my big things is to be long the new China and short the old China.
MarketWatch: And how do you define the new China?
O’Neill: It’s related to the consumer. In some ways, the Shenzhen index (SHE:CN:399106) is more representative of the new China than the Shanghai (SHA:CN:SHCOMP) , so one way to play this is to be long Shenzhen and short Shanghai.
Another way is through global consumer stocks. Look at Apple’s (NASDAQ:AAPL) latest results — again the main reason why they blew the market away was simply because of their sales to China (...) The more I think about it, Apple is a Chinese stock, not a U.S. stock. It’s a stock that’s got U.S. technology, but basically its future depends on China.
BMW (FRA:DE:BMW) is another company with strong sales to China.
MarketWatch: So you don’t see a hard landing there?
O’Neill: I think it’s ridiculous. China is clearly slowing, but most of the reason it’s slowing is because the policy makers deliberately want it to slow and get China readjusted. So, as I’ve said for the past two years, China is never going to land anytime soon.
It’s not soft versus hard landing — it’s kind of a crazy idea. China is always going to keep traveling. And I think compared with the other BRICs, China is doing a great job. I worry about Brazil and Russia a bit, and this ongoing election in India is a really important thing.
Russian caution
MarketWatch: As for Russia: The MICEX index is down more than 10% year-to-date. Do you think this is a good time to buy?
O’Neill: Russia appears cheap. So one has to keep thinking all the while: Is Russia going to continue to be as bad as it is? I think the answer to that is that it’s very hard to know.
One part of my brain thinks [Russian President Vladimir] Putin has gone a bit mad, but another part of my brain thinks of Putin as being actually quite sophisticated, particularly in terms of his tactics with the rest of the world. And I can’t imagine that things would carry on deteriorating the way that they are.
But let me put it in a bit more specific way: About a year ago, I bought a two-year call option on Russia, personally, on the Russian index, because I thought it was cheap. I was losing quite a bit of money, even before this mess. But as soon as this mess started, I thought: I’m out.
MarketWatch: So would you buy into it now?
O’Neill: No. Despite the valuation, I’d want to see some evidence that something’s changing (...) They need something to get their economy going. I don’t dismiss the possibility — in the crazy way Russia and Putin work — that one of the reasons he’s doing this is to distract from the fact the economy is really struggling.
Short the euro
MarketWatch: If you don’t want to invest in Russia right now, is there another place you think is overlooked, but potentially really exciting?
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The euro trades close to the $1.40 level
O’Neill: I think the low volatility we see in the currency markets is interesting, and I think it’s unlikely to stay. I personally think shorting the euro (ICAP:EURUSD) is finally worth doing, as we are close to $1.40. I’ve done that recently myself.
Trying to short the New Zealand dollar (ICAP:NZDUSD) is also interesting, to me, because the government and the politicians are exploring changing the central bank’s inflation-targeting mandates. And it’s a place I’ve followed — they were the first country to ever introduce inflation targeting, so I’ve followed it since the early ’90s, so it’s something I’m pretty close mentally to. And I think that’s important. New Zealand suffers from a very overvalued currency.
MarketWatch: Would you say the euro is overvalued as well, or is it just low inflation that’s the problem in the euro zone?
O’Neill: Both. The euro is definitely overvalued, and of course they have far too low inflation. And the pressure is building to do something of significance.
[European Central Bank President Mario] Draghi would love to do something, but he’s constrained by these lunatics in Frankfurt. You know the Germans won’t accept that German inflation should go above 2%. But as we creep through time, the pressure is going to build, and I noticed the new French prime minister [recently] said the euro should be devalued. If you go back as long as I do, usually when the French start making big noises about currencies, something happens.
MarketWatch: What’s the best tool for ECB easing?
O’Neill: The whole idea of buying corporate bonds would be the best thing for them to do. I don’t know whether that’s what they’d do at first.
MarketWatch : In terms of the euro exchange rate, how low do you think it has to go?
O’Neill: Given Europe’s challenge, Spain’s challenges, the challenges of the rest of the periphery — the euro shouldn’t really be above $1.20. That would be a sensible level.
Away from the currencies, in equities: I have believed all year — and I continue to believe — the best places to invest are peripheral Europe. So Italy, Portugal, Spain and Greece. They are outperforming, and I expect that to continue, because they are showing some recovery. If the euro reverses, it’ll help them even more.
Downbeat on U.S. stocks
MarketWatch: U.S. stocks have been quite strong and are close to record highs. Do you think we’re due a correction?
O’Neill: One of the things I’ve learned from my intense days in [London’s financial district] the City was that, when everyone was searching for upside, I started to believe in this so-called five-day rule. So if the accumulative move on the S&P (SNC:SPX) the first five days of January is up, there’s 85% probability of a rally for the year. If it’s down, it’s 50-50. Guess what happened the first five days this year? It was down. So in my opinion, it adds to my view that I don’t know what’s going to happen with the U.S. market, but it wouldn’t surprise me if it goes down.
I’m slightly in the negative camp, because I also believe in this “sell in May and go away” thing. If you look at the past 50 years, it kind of works. For whatever crazy reason. There’s no logical reason, but it works.
MarketWatch: If you had money to invest now, would you put any of it in the U.S. stock market?
O’Neill: Not really. No.
MarketWatch: There’s been a lot of merger activity recently. What do you think are the characteristics of the next big M&As?
AstraZeneca says 'No thanks' to Pfizer
AstraZeneca rejects an improved takeover offer from Pfizer worth more than $106 billion, saying the proposal substantially undervalues the company.. Photo: Getty
O’Neill: What is interesting is that in both Europe and the U.S., many companies have an enormous amount of cash. To me, the broader thing from your question is: We may be at the first point where the stock market is going to start rewarding companies for investing, as opposed to keeping cash.
One of the post-’08 things has been “cash is king” for corporations. Maybe that’s about to change. And if that’s true, it could happen in a number of industries. Certainly in tech, but also, as we’ve seen, in pharmas and global cyclicals.
MarketWatch: Do you see any big European tech companies as a takeover target?
O’Neill: A classic one is looking at Scandinavia. You look at each of Nokia (NYSE:NOK)(HEL:FI:NOK1V) and Ericsson (STO:SE:ERICB) , and they are sort of not what they were. So would it be surprising if you woke up tomorrow and saw that somebody was going to buy Ericsson?
It wouldn’t surprise me if Ericsson maybe tried to buy BlackBerry. Don’t know anything about that, but I wouldn’t be surprised.
MarketWatch: A few years ago all headlines were about the euro-zone crisis, and now it’s all M&As.
O’Neill: It could be the beginning of a big change.
http://www.marketwatch.com/story/jim-oneill-short-the-euro-watch-apple-and-more-tips-2014-05-06/print?guid=667EAE16-D203-11E3-8FB0-00212803FAD6
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