Jim O’Neill, Chairman, Goldman Sachs Asset Management.

I spent most of this past week in New York, and to my slight surprise, there appears to be some shift in the mood about the state of life. Whether this is because it is the start of the year, asset prices have been perkier, or there is some recognition that the US economy and other parts of the world are not as bleak as the second half of 2010 is not so clear. It was certainly quite nice to hear and, in my judgment, is more reflective of what is going on.

The US improvements.

I have talked in many Viewpoints since last August that I thought the US recovery would be stronger than people realized.  Most of the additional data being published gives fresh support to this view. A renewed drop in weekly job claims and some further better-than-expected housing data occurred this week. These releases coincided with more signs from the business world and beyond that the economy may be improving. Four different areas pricked up my ears. The first is repeated evidence of a pick-up in commercial bank lending from their Q4 results and, with it, the reported money supply from the Fed. The second is a changing mood about the housing market, in addition to a better tone of some of the data. Third, there is a lot of growing marginal evidence about US manufacturing becoming more competitive, including another interesting story in the US edition of the FT on Wednesday. And fourth, there is considerable talk about the rapidly-improving domestic energy supply situation in the US which, in itself, is helping boost the domestic industrial plans of some of corporate America. All four of these items were things I suspected were happening, but it was quite refreshing to hear so much talk about them.

About the only thing left to sort out is the staggering amount of wasted time one encounters going through passport control at JFK these days...

I continue to believe that the consensus on the 2012 US outlook needs to get a bit cheerier since most professional forecasters have not yet captured this mood. There is a view that much of the improvement has been seasonal. While possible, I have increasing anecdotal evidence and belief to suggest it is more. We are still forecasting 2.5 pct real GDP for 2012 at GSAM, which is above consensus. Outside the US.  China.

The mood I encountered about the world outside the US wasn't quite as dreadful as I had heard on previous visits, with a couple of people telling me that the ECB's 3-year LTRO was a "game changer". More on that in a minute.  In addition, I didn't hear quite as much passion about the Chinese hard landing view either. This might be because on Tuesday, the Chinese stock market enjoyed its largest one-day rally in a long time, coinciding with a set of much better-than-expected economic reports and talk of forthcoming monetary easing. This week's Economist has a very interesting piece about the latest Chinese data, suggesting that the share of consumption in GDP might have started to pick up. As I have maintained as the number one global topic for this year, if China can combine "slower" growth with a rising consumer, a softer external surplus and lower inflation, this is as close to nirvana as you might get. As the Economist piece suggests, there are some strong hints of this already in the Q4 GDP report. While China's GDP at 8.9 pct was its weakest quarter for over 2 years, it was better than expected.  And, while we have sketchy details, the trade surplus ended the year barely above 2 pct of GDP and the latest retail sales were above 18 pct.

One other point for all the China bubble watchers out there. Official Chinese estimates now show that just over 50 pct of the population is urbanized. Based on most people's estimates, including work I have been involved in, it is likely to move to 70 pct before one can assume China is urbanized. This involves around another 200 million people moving into cities. Quite how there is supposed to be a nationwide house price bubble with this prospect ahead I have no idea, but many don't seem to appreciate this. Moreover, as I pointed out at the GS macro conference where I spoke, in complete contrast to the US, Chinese house prices have reversed in the past 18 months because policymakers deliberately stopped them from rising. At some point, when they reverse policy tightening, the house price "problem" will turn out to be not as big a deal as so many fear.

Linked around Chinese developments, as I showed in the one slide that I was allowed to show at the macro conference, the rising power of the 8 Growth Market economies will actually boost the world economy's growth potential this decade to somewhere close to 4.5 pct, not the grim world most believe in.

A couple of other things caught my eye in this context this week. Indonesia had its credit rating revised back to investment grade by Moody's this week, only 14 years since it was revised down to junk. (There is hope for Portugal and Greece too eventually.) And another FT story I saw suggested India, disappointed by 7 pct growth - close to the rate we assume for the decade - is considering a large public sector stimulus. And Europe?

It was a better week for European markets again, despite the S&P downgrades and occasional fears about Greek debt restructuring. Some of this appears to reflect the changing appreciation of the 3-year LTRO that the ECB undertook in December, another of which is coming in February. As mentioned above, a couple of people I spoke to seem to think this is a possible "game changer". While it obviously can't solve deep fundamental issues facing Euro Area economies, it certainly has dramatically reduced the chances of a systematic banking crisis and, in the process, cut the vicious circle between that and sovereign debt holdings, and in addition, greatly reduced the risk of contagion beyond Europe. I am somewhat baffled as to why so many people still worry about this risk now. I saw a presentation while I was in NY that considered various risk scenarios around a central growth forecast for the US a touch below our official one. It contained a probability of a banking crisis of 25 pct - linked to Europe - and just 10 pct for "normality" for the US, or growth back at 3 pct. I cannot see this risk being anything close to this in the next 3 years.  In my view, because of the LTRO, it can't be much at all.

On top of this, we had another impressive performance from Mario Monti, the new Italian PM this week. In addition to presenting a number of important supply side structural reforms, he took to giving the FT a most interesting interview this week. In addition to being one of the few leading policymakers who wasn't moaning about credit rating agencies, he suggested that lots of changes and reforms are necessary. The most interesting part was reserved for his suggestion that Italy needed some kind of "reward" for its efforts to get its fiscal house in order, which follows up the previous week's suggestion that the ECB can relax as and when the so-called Fiscal Compact is agreed, possibly at the end of the month.

Both of these forces suggest to me that the improved performance of the Italian bond market makes a lot of sense, and I suspect it is set to continue.

There are plenty of things that can still go wrong, but it is true that, apart from the above, the European markets have started the year in better shape despite the widespread credit downgrades, all the fears about the French election and, of course, the uncertainties surrounding Greek debt talks.

I am wondering whether it is because there is also some acknowledgement that the German economy is not only holding up better than the worst case scenarios, but it is also adjusting more to stronger domestic demand. I heard one of the better ex ECB board members this week suggest that this was happening, citing the easiness of German financial conditions and apparent evidence of a strengthening construction sector. As he suggested, this is actually how the EMU can and should work as the system adjusts. Markets and What Can Go Wrong?

Given that the successful passing of the 5-day S&P rule has transferred into apparently the market's best start since 1987 (let's not worry about the October factor that year for now), and there are continued signs of less intense correlations across asset classes, it all feels rather nice for those of us who have maintained a more cheery view of the world.

My comments last weekend regarding Japan, its debt, JGBs and the Yen got picked up on quite a bit at the macro conference and one or two people are starting to think that "this may be the year". Certainly, if the Yen were to move back above Y78.30-ish, I suspect quite a few might want to explore that idea. As I wrote and said at the event, looking out over the next couple of years, this is a lot more interesting now than the European story.

Trying to maintain my emphasized fresh 2012 focus, I think we need to watch the flash European PMI's in the week ahead to see whether the macro picture is stabilizing as December suggested or whether it was just a temporary factor.  And, of course, the early February data the week later will be most interesting in terms of global trade patterns at the start of the year (Korea's first 20 days of January looked a touch softer, but let's see the whole month.) The GS Advance Leading Indicator for January shows further signs of improving global momentum, which is good to see, so let's see if it is maintained.

When I was quizzed last week about what could go wrong, I found myself thinking in terms of the Middle East. I think I noticed during my travels that Saudi Arabia is now suggesting it wants a $100 per barrel oil price, which suggests they are struggling to finance their big boost in domestic spending. I say this, because from everything I increasingly read and hear, it seems to me as though the fundamentals for the energy markets are turning. Natural Gas prices continued to drop in the US last week linked to the remarkably rapidly shifting US supply and demand changes, and the IEA is revising down its estimates of global oil demand. The implied consequences for energy prices is obviously good, but if this is where things may head, some countries that have gotten used to constantly rising prices are in for some challenges. (Russia is obviously one of these countries, which is why Putin needs to deliver on his frequent suggestions of shifting the balance of their economy.)

Beyond this, it seems to me that there are so many exciting things going on, lots of focus on changing equity and bond market benchmarks and so on. We have done a lot of work on the equity benchmarking issue, and I am increasingly thinking we need to turn our attention to bond market benchmarks now too.

You may be pleased (or not) to know that I won't be writing a Viewpoint next weekend as I shall be in Prague.  Some big football matches in the UK this weekend, also exciting, at least ahead of them!

Jim O’Neill, Chairman, Goldman Sachs Asset Management

Late Friday, the S&P finally followed through with their early December 2011 threat and downgraded a number of European countries’ credit rating, including Austria and France, who lost their AAA status. This threat had been hanging  over the markets ever since the last EU Summit and, at least for this credit rating agency, the framework proposed for  the “fiscal compact” has not been sufficient to avoid the downgrades. I am going to devote my Viewpoint – shorn of my picture you might be pleased to notice – to the topic of Europe and its challenges.

Markets Since the Turn of the Year. 

As with most weeks, I spent my time last week talking to a vast and diverse group of people from all over the world.  This week, I had a call with a well-known NY-based hedge fund and they wanted to know why markets weren’t trading  better in view of the stronger news from the US and Europe so far this year. I hadn’t quite realized the subtlety of their  line of enquiry at first, assuming that they were expecting markets to soon start falling sharply again, despite the fact that the year had got off to a stronger start than many had expected (and my beloved 5-day trading rule in the S&P 500 passed with flying colours!).  The only answer I could think of is that people were braced for further bad news from Europe and that, any day, S&P were likely to go ahead with their downgrades. Our fixed income investment team had been expecting the downgrades at any moment since mid-December, soon after the last EU Summit, and I lose count of the days when rumours swirled it would be that evening.

In this broader regard, it will be fascinating to see what happens Monday when markets have the first full day to respond to the S&P announcement. Despite widespread expectations that this bad news was coming, in addition to the generally stronger performance of global equity markets, different sectors have led this recovery, with US banking stocks and many commodity-related markets showing leadership. As I remarked to some of my colleagues on our weekly CIO call, it has been extremely interesting to observe the rise of US financials, despite the weakness of many European financials persisting. This is a change from the weekly, and often daily, behavior of last year. It is also the case – despite a lot of negative media commentary – that a number of the larger “Growth Markets” have gotten off to a much better start in 2012. Brazil, India and Russia are all up more than 4 pct and China is also in positive territory.

Europe is Not the World. 

In the context of the slightly healthier start to the year, before I delve into Europe’s many challenges, I would like to reiterate that Europe is not the world. Everyone should know this, but as I move from meeting to meeting, it often doesn’t seem so. On Friday, I attended a lunch along with 4 other guests hosted by a foreign government here at their UK embassy, and at least 80 pct of the discussion was about Europe. It is generally the same pattern everywhere I go, except for when it is a specific Growth Market event that I have been asked to lead.

I attach our January Viewpoint which applies the GS Economics Paper number 208 to our Growth Market mindset and our view of the future of the world economy. As we point out, despite China growing at a slower rate in the 7.5 pct vicinity this decade, because of their and other Growth Markets rising importance, the world can grow by close to 4.5 pct this decade, higher than the past and previous two decades. This is despite rather modest assumptions about the growth potential in Europe and the US, and relatively conservative ones across the Growth Markets.

In this vein, as I suggested back in December, over the next 12 months, the four BRIC countries alone will probably add close to $2 trillion in US$ nominal terms, not far off the equivalent of a new Italy. And, as we show in the January Viewpoint, in a couple of years, the combined GDP of the four BRICs will be bigger than the US.  Before the end of the decade, the combined US$ value of consumption in the eight Growth Market economies will be bigger than the US consumer.

As pointed out to me by Neeti Bhalla last week, a significant proportion of quoted European company earnings are dominated by their global sales, and despite their severe domestic sovereign and financial challenges, many European companies will be influenced by the rest of the world. This is, in turn, why the German economy has generally performed so well since 2008, but it is also relevant for some parts of other Euro Area economies.

The S&P Decision.

So the big question this weekend is whether we have learnt anything new? Given that the downgrades were highly signposted, it has to be one of the most widely anticipated moves of all time. Putting this together with the fact that when both Japan and the US lost their AAA credit ratings a long time ago and there were no discernable negative market consequences, I am not sure this news is that interesting. It will certainly be a source of political fun and games especially in France, but whether it is relevant for the markets remains to be seen.

Against that, this is Europe we are talking about and everything is always more complex.  With 2 of the 6 previously AAA-rated countries losing their rating, the effectiveness of the EFSF is likely to be questioned even more, as it can no longer be treated as AAA unless either Germany contributes more (presumably tough) or there is some other clever scheme dreamt up. As important as a complication as this is, given that the downgrades were expected, markets have likely, to a large extent, been pricing in this issue also.

What is more interesting to me as I read the S&P statement and the brief comment from John Chambers is the rationale used. S&P appear to doubt the likelihood that the fiscal compact will be successful in contributing to a framework for stronger growth, implying that fiscal tightening leads to weaker growth which then leads to bigger deficits. In that regard, their decision endorses the views of many observers that the German-inspired fiscal compact is not really the right path.

Europe Needs Growth.

I strongly sympathize with this judgment.  In addition to the remarkable challenges facing Ireland and Greece, who have both undertaken their own versions of the austerity medicine, one of the more revealing pieces of news so far this year is that Spain’s budget deficit appears to be closer to 8 pct than 6 pct, an announcement that was followed by plans to further tighten fiscal policy. When you consider the fact that before 2008 Spain appeared to have the best fiscal position of the big 5 Euro Area member economies, you can see the importance of the lack of growth.

In this context, some might describe the fiscal compact as more like “compost” as, without some offsetting measures elsewhere, all indebted countries tightening fiscal policy further simply to satisfy some new numerical target doesn’t seem like sensible economics, especially for those with large youth unemployment and members of a union that, never massively popular, is increasingly regarded as a problem.

To complicate matters, some Euro Area policymakers realize the potential insanity of the above and have inserted an “escape clause” into the fiscal compact discussions that allows countries to avoid tightening further “in periods of severe economic downturn”. This strikes me as sensible in principle, but whether Berlin and Frankfurt will agree remains to be seen. The early signs from ECB members is that they worry it will be an excuse for countries to avoid structural challenges.

From a big picture perspective, there is a lot of evidence that major fiscal tightening, especially if it includes reductions in government spending, is rather key to raising countries economic growth potential. If you throw in supply side reforms, and – what might normally be the case – easier monetary conditions such as a decline in the exchange rate and lower interest rates, this is the classic recipe for a nice long-term outcome. However, given the constraints of a monetary union, and one seemingly dominated by Germanic caution, it is not so obvious that we can get there.

Competitiveness Issue a Slight Red Herring?

It is increasingly fashionable for many to suggest that whatever medicine thrown won’t work because the problem for most of the troubled countries is that they are uncompetitive, and have been unable to adjust to the slow and significant improvement in German competitiveness the past decade or so. While a number of simple measures support these general conclusions, taken too far, they belong in the same box of “dangerous economic theories” as the fiscal compost idea.  For Greece, Portugal, Spain and Italy to all deliberately improve their competitiveness relative to Germany would involve additional domestic cyclical pain, as many argue. But my point is not this.  It is what the consequence would be if they did. The consequence would be a less competitive Germany, which would mean a possible future fresh attempt to superficially improve competitiveness’ there. It does seem to me that Greece and Portugal need to significantly improve their competitiveness, but this argument is unclear to me for Italy, and to some extent, Spain. The research I am most familiar with, such as the GSDEER model (Goldman Sachs Dynamic Equilibrium Exchange Rate), which incorporates relative productivity, doesn’t suggest anything dramatic for these countries, at least within the monetary union.

Where the Euro Area can achieve more competitiveness is against the rest of the world, and this links to the broader required response to the S&P verdict this weekend, an easier monetary policy from the ECB, and stepped up efforts to reduce long term interest rates in the troubled Club Med countries. A further significant easing in Euro-wide financial conditions is the appropriate response to the fiscal compact, as it will be this that will help soften the cyclical blow from tightening. Whether the Euro Area can achieve this at a time when Japan, the UK and the US are all eager to maintain their own easy financial conditions, if not strive for even easier ones, is amongst further challenges, but at least the ECB needs to try.

Italy Seems Key. 

While the immediate spotlight will shift to France once more, not least of which because of the forthcoming election battle and the anti-fiscal compact stance of the opposition, I find ongoing things with Italy rather intriguing. Speaking in the days before the S&P news, PM Monti suggested that if the fiscal compact is signed up by all Euro members by the end of January, the ECB should “relax” a little. This follows some rather positive comments about the new Italy the day before from German Chancellor Merkel. When ECB President Draghi was asked about Monti’s comments, he successfully sidestepped them, although he did add that markets appeared to show some attention to recent policy developments in Italy, which was itself interesting.

As my colleague James Wrisdale suggested to me Friday, it is not clear what anyone can expect more of Italy in the short term. Already probably the more credible cyclical fiscal stance of the G7, the additional tightening announced by Monti’s technocratic government, along with announced supply side reforms, the ECB should be embracing them. By coincidence, I happened to be a guest on a conference call with around 40 of Italy’s leading CEO’s this week as these events were unfolding.  I was asked some quite searching questions at the end of the call. In particular, how come the markets are treating Italy with such a discount to Spain, and even more so Japan?  And, why did Italy’s major banks have the equivalent market cap as just one leading French bank? Beyond Italy’s legacy of debt and the fact that Italian governments don’t have long histories, I had no good answer. In fact, hearing these comments added to my belief that it might be time to turn away from this focus on Europe to elsewhere.

Japan versus Italy. 

I mentioned twice in the past recent weeks that, when you stand back from the fray and take a cold look, why does Italy deserve 6-7 pct 10-year bond yields when Japan with a debt/GDP ratio of 220 pct has 1 pct yields? As I said, I was asked this on the above call. I increasingly suspect that, within the next couple of years, their 10-year yields will be closer to each other in the middle, i.e., 3.5 pct.  The question is especially interesting at a EUR/Yen exchange rate below 100.0. On the quiet, the Japanese situation is deteriorating quite markedly and, as some investment banks have suggested recently, Japan is closer to another major structural shift, i.e., going from current account surplus to current account deficit. The post nuclear energy requirements of Japan, on top of its slowly declining household savings rate, suggests the sort of concerns being expressed about Italy are much more valid in Japan, given that Italian markets have adjusted and Japan’s have not. For all you macro players out there, the Japan picture we have all had the occasional flirt with over the past decades, it is getting closer.

And then there is Greece. 

I can’t leave the European issue without a mention of Greece. If all the above complicated twists and turns are not enough, then there is the Greek debt situation and, according to weekend reports, negotiations over the so-called PSI have broken down and the prospect of a default is back on the agenda. For many, this is the issue to really focus on and where the next bearish phase will come from. Maybe so, but to me, once this is finally out of the way, if the monetary authorities play the role that they should, then in fact, on the contrary, we might be able to move forward.

And the Noisy Neighbours. 

I was tempting fate on two levels in last weekend’s Viewpoint. In addition to raising the likelihood that the S&P500 would close up after the 1st  five days of trading with still a day to go, I also talked about  Manchester United shutting up the noisy neighbours a little. Well we beat them – despite making very hard work of it – but so did “they” from down the road later in the week, which pending results in the next couple of games, might make them rather less noisy at least for a while. Life is not all bad.

By Jim O’Neill, Chairman, Goldman Sachs Asset Management

What a shame that 2011 is drawing to a close.  It was such a nice easy year for everyone…

This will probably be my last Viewpoint for the year, so let me wish you all the very happiest of holidays and best wishes for 2012.

One thing for sure we can say about 2012 is that there will be no shortage of things to think about. In some ways, for the discerning analyst and the ambitious alpha generating fund manager, you couldn’t wish for a better environment. The only dilemma is that it is probably quite easy to get something(s) wrong!

Against the background of our December Monthly, let me make some guesses about 2012:

1. We won’t all talk about Europe quite as much next year as we have in 2011, although I suspect that, in the first few weeks of the year, it might seem like it.  Europe will still be called Europe, and with a bit of luck, it might go back to being as dull as it usually is. (especially with Man United out of the Champions League)

2. As I have said in the past few weeks, the EMU cannot survive without Italy in it, and Italy cannot survive with 6-7 pct 10-year bond yields. In that regard, the stage that this crisis has moved in recent weeks is both scary and exciting. Take your pick as to which one you wish to explore (if not both).

3. The Euro is more likely to reach1.10 next year, rather than 1.50. I doubt it will see both, and it might not see either, but 1.10 is more likely than 1.50.

4. The Yen is more likely to see Y100 than Y60, and I suspect Y100 is quite likely (although I thought that about 2011 too). In fact, if we can clear the Y79.50-80.0 area, it is rather probable.

5. EUR/CHF is more likely to see 1.40 than 1.00.

6. There are plenty of economic, political, social and policy risks for 2012. They are not all negative. It is quite conceivable that not only the US will continue to surprise on the upside, but others could too. This includes some of the BRIC and other Growth Markets like Brazil and even India – where it is ever-so-fashionable to now think the days of License Raj and Hindu weak growth are back.

7. Europe might easily disappoint even more on the downside – indeed, our first formal GDP forecast is below consensus. But it is not impossible that it might surprise on the upside.

8. The S&P is more likely to be above 1400 this time next year than below 1000.

9. China won’t have any kind of landing in reality, neither hard nor soft, but it will still be travelling. It might have seemed like a soft one though.

10. The MIST will continue to hover around the BRICs…As some observers have noticed, the other 4 countries that we define as Growth Markets – Indonesia, South Korea, Mexico and Turkey – can also be expressed in the form of a nifty acronym.  And, they are rather interesting places, with all 4 having something to offer. Right at this moment in time, they don’t seem to have the same specific issues as each of the BRICs, but they are not quite as important for the rest of us. However, all 8 countries put together are going to become more and more important for the ongoing evolution of the world economy and markets.

11. A team from Manchester will probably win the English Premier League. A team from Manchester will probably not win the Champions League.

Seasons greetings. With a bit of luck, you won’t read one of my Viewpoints again until January 7/8th  2012.

Steven Tishman has joined Houlihan Lokey as Global Head of M&A. Previously Steven was co-head of U.S. M&A at Rothschild.

Houlihan Lokey, one of the largest global private investment banks is currently taking steps to actively expand its services in Eastern Europe and the CIS. It currently covers these regions from European offices and have already completed several high-profile mandates in Russia, Kazakhstan and Eastern Europe in the two years since the coverage team was established. Several high-profile projects completed to-date include a comprehensive valuation of the assets of Russian holding En+ Group, along with providing advisory services on the restructuring of the group’s foreign debt during 2009-2010, and also advising Kazakhstan-based Shalkiya Zinc on their takeover during 2010-2011. The firm is ranked globally as the No.1 M&A fairness opinion advisor over the past 10 years, the No.1 restructuring advisor, and the No.1 M&A advisor for U.S. transactions under $1 billion by Thomson Reuters.

Jim O’Neill, Chairman, Goldman Sachs Asset Management

Tomorrow, Wednesday, November 30 is the tenth anniversary of when I first mentioned the BRIC acronym when I published GS Global Economics Paper No: 66, “Building Better Global Economic BRICs.” As I am sure a number of readers now know, I am publishing a book to celebrate the anniversary. It is called “The Growth Map.” Any proceeds accrued to me from the book will be donated to the charity SHINE, Support and Help In Education “www.shinetrust.org.uk” that I am Chair of, and helped set up with some friends back in 1999.

In this week’s Viewpoints I decided to highlight some of the major observations involving the BRIC development over the past decade, as well as some key issues related to ongoing recent events.

The 2001 paper didn’t create a lot of attention at the time. It was not really until after the publication in 2003 of GS Economics Paper No: 99, “Dreaming With BRICs: The Path to 2050,” authored by Dominic Wilson and Roopa Purushothaman, that the theme really caught on. The fact that many large multinationals started to embrace the BRIC concept around this time and, of course, the happiness of the four BRIC countries themselves, helped give the theme such a push.

There were three essential arguments I made in the 2001 paper:

Firstly, I simply pointed out that if on a relative and absolute basis the strong growth of the four BRIC countries¾Brazil, Russia, India and China¾continued at the same pace, by 2010 they would become a much larger part of the world economy. In the most optimistic of the scenarios I considered, I suggested that their combined share of GDP could rise from the then 8pct to around 14pct. In the event, their share has risen to around 18-19pct. I suggested that China might get close to the size of Germany. In the event, it has sailed past Japan and has already become not far off twice the size of Germany. I suggested Brazil might get close to the size of Italy, and it actually crept above them to be the seventh largest economy last year. The collective nominal growth of the BRIC economies was close to $10 trillion creating more than three times their 2001 size of around $ 3 trillion.

Secondly, because of their relative shift, I argued that the BRIC countries should become more central to global economic policymaking, suggesting each of them, certainly China, should become part of the G7/G8-type groupings. Of course, while this hasn’t happened quite this way, the G20 was placed at the front of global co-ordinated policymaking primarily to bring the BRIC countries into the centre. It took the global credit crisis in 2008 for this to happen, but it has, and this is probably one of the better things that have happened since. Despite many issues about the operational effectiveness of the G20, its legitimacy is greater than that of the G7/G8.

Thirdly, another key¾and currently still very topical¾point of the paper was my argument that since France, Germany and Italy were all now part of a monetary union with no independent monetary policy, why didn’t they agree to represent themselves collectively in the G-meetings and indeed at the IMF? Amongst other things, it would demonstrate to many that their commitment to a permanent monetary union was rock solid. This is one of the BRICs that still needs to be built. In hindsight, this lack of bold vision and leadership was, and has been, symptomatic of the weaknesses in the structure of EMU, many of which, of course, escalate by the day. If EMU is to survive in the future, then the Euro zone must start to act collectively as one. Perhaps this is now where we are headed, and certainly the increasingly vocal call for a new, stronger fiscal framework from German Chancellor Merkel shows what they would like. As I will discuss more below, while there is plenty of debate about the role of true Euro-denominated bonds, more and more Euro policymakers are moving towards this ultimate goal. Merkel is now openly suggesting a revised Treaty to accommodate it, and following her joint meeting with Sarkozy and Monti last week, a specific proposal looks like it is going to be presented by December 9. If this is where the Euro Area is ultimately headed, with a central Finance Ministry-type entity, then it should be relatively straightforward for all remaining Euro members to combine as one when it comes to their representation in the IMF and at G7-type meetings. If so, this would allow for the eventual reduction of the G20 towards something more like a G9 which is what I argued for back in 2001. The four BRIC countries would join the Euro Area, together with Japan, the US and still probably Canada and the UK. Of course, there would be questions about the legitimacy of the latter two and perhaps it might eventually be just a new G7 without them. The existing G20 could serve as a broader umbrella group but would not be as central as it currently has become.

Looking Back and Forward With the BRICs.

As I said, the BRIC economies combined have grown to around $13 trillion and are poised to overtake the size of each of the US and the EU in coming years. Over the decade, they have created the equivalent of close to seven new United Kingdoms or at least of the 2001 size. China alone has added slightly more to world GDP than the US, around $ 5.5 trillion probably by the end of this year.

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 $ terms, assuming that they collectively grow at somewhat softer rates. If they grow by similar degrees as the last decade, their contribution in nominal $ could be closer to $20 trillion. China seems likely to grow by more modest rates, perhaps in the 7-8pct range, but India could accelerate. This could be especially true if India persists with what looks like some sudden passion for policy reform. In what I would describe as the most interesting economic news of last week, on Thursday the Indian government appears to have decided to allow majority foreign ownership of their domestic retail businesses. This is obviously huge news for the world’s biggest retailers given India’s fabulous demographic but it is probably even more important for Indian agricultural productivity and supply chains which is why policymakers have finally decided to take this step. More of these kinds of decisions and India will possibly finally succeed in achieving China-style GDP growth rates.

Another major consequence of the BRIC story has been the desire of other large-population emerging economies to get into the “club”¾something itself we recognized back in 2005 when we thought of the “Next 11” idea. Many of these countries before and after have wanted some of that BRIC “magic”. These days, at GSAM, we regard four of them¾Indonesia, Korea, Mexico and Turkey¾as sufficiently large and important to be considered “Growth Markets” along with the BRICs. Going forward, it is quite likely that others may become this differentiated, perhaps at some stage including part of Africa and the Middle East. I discuss aspects of this in the book. I spent last Friday in one of the non-BRIC Growth economies, visiting Istanbul to present my views of the world for a major client. I was literally in and out, but what a remarkably vibrant city Istanbul is these days. I cannot understand why continental European countries are not more eager to embrace this country, especially as it would seem like an obvious credible “model” for some of the dramatically changing nations in Northern Africa and the Middle East.

As it relates to the BRIC politics, Philip Stephens wrote a very interesting op-ed in last Friday’s Financial Times entitled “BRICs without Mortar.” He points out that the four countries are not natural political bedfellows, highlighting some of their bilateral issues and many of their differences. I would agree with many of his points, but I don’t think this means they are not increasingly relevant for the world and, as discussed above, they should be more and more central to optimal global economic policymaking. I never suggested that they should operate alone as a political club, and other than highlighting the inadequacies of the current G7, etc.,  the purpose of such a club¾-especially now South Africa is included¾seems a bit limited. However, by the end of this decade, the BRICs and the other four Growth Markets collectively will be not far off the size of the G7.  The BRICs collectively will be bigger than the US. So, from an economic perspective, the BRICs will be contributing lots of mortar.

Against this background, it seems inevitable that the current world monetary system is likely to evolve differently with, at a minimum, the role of the RMB becoming more important, and as I discuss in the book, perhaps other changes might occur.

By Eugene Kasevin.

Russian President Dmitry Medvedev has kicked off his own little Cold War just in time for the upcoming parliamentary elections.

The move will be widely perceived as rhetorical shot across the bows of the US administration which is planning to build a missile-defense system in Europe. It also serves a rallying cry to the apathetic masses as his ruling party struggles with waning popularity.

How this might impact Russian capital markets, if at all, is yet to be seen, but it certainly supported the earlier dismissal of the ex finance minister Alexei Kudrin. A darling of investors for his fiscal prudence, Kudrin dared to criticize federal budget and defense spending proposals before he was ousted by Medvedev in late September.

If this is more then just a pre-election bluster, foreign investors may perceive that the statists within the Kremlin are out-muscling the so- called liberal camp. Russia's 1 trillion privatization programme, which is already been delayed because of global stock market volatility, may be pushed off the buffers entirely.

Ultimately, Russia's ability to sabre-rattle and to alienate the West all depends on the price of crude. If oil remains well above $100, the tandem can afford to poke Uncle Sam's eye with its red stick. If oil tanks to 2009 levels, Russia's leaders will be far too occupied with domestic issues to resort to cold war propaganda.

Charles E. Ryan. Chairman, UFG Asset Management

 By Andrei Skvarsky.

UFG founder Charlie Ryan has sealed his reputation as the most successful foreign banker in Russia ever by clinching a deal which nets him a fourth payout from Deutsche Bank. The American banker, who oversaw Deutsche Bank’s Russian operation from 2005 to 2010, is selling Deutsche the remaining 60% stake in UFG’s Capital Management unit that the German lender does not own.

A Harvard graduate, Ryan first came to Russia in the early 1990s as a banker for the European Bank for Reconstruction and Development (EBRD) when he landed in St Petersburg to help advise the local authorities on how best to privatise local municipal assets. One of his key initial contacts in the mayor's office was one V. V. Putin, who was deputy mayor at the time to Anatoly Sobchak.

Spotting a gap in the market, Ryan and a partner Boris Fedorov decided to strike out by setting one of  the country's first ever investment banks.

``Charlie has had the intelligence to understand the Russian political and economic context before positioning, and to pick his partners well,'' commented Eric Kraus, an independent fund manager in Moscow.

 By Andrei Skvarsky.

State-owned bank VTB would benefit seriously during its planned partial privatisation from a share pricing measure proposed by Deputy Prime Minister Igor Sechin, Renaissance Capital analysts argue.

Sechin last week proposed an amendment to the 2011-2013 privatisation programme to ensure that the starting price of a state company in any privatisation deal should not be lower than the firm’s price during its initial public offering of shares. Prime Minister Vladimir Putin asked the government to take the idea into account.

VTB, Russia’s second biggest lender, is trading its shares at half their IPO price of 136 rubles ($4.37 at today’s exchange rate).

“If indeed such a rule [the measure proposed by Sechin] is implemented, it would significantly reduce medium-term stock overhang risk for VTB,” the RenCap analysts say in a comment.

VTB is to have a 25% stake privatised under the programme, and has a 10% stake set to be sold in 2012.

The current market price of Russia's biggest lender, state-owned Sberbank, which is also on the privatisation list, is just 10% below its IPO price of 89 rubles per share ($2.86).

By Chris Weafer, Chief Strategist at Troika Dialog.

“Money is better than poverty, if only for financial reasons”

Woody Allen Relief at political changes. Markets finished last week with a palpable sense of relief that the political crisis in Europe has been contained and that this may allow for a more determined effort by the new administrations in Greece and Italy to deal with the debt issues.

Nobody can take for granted that the crisis has now been resolved, far from it, but there is greater hope that the worst has passed for now and the “can” firmly kicked into 2012. Coupled with the EU political relief is also the greater sense of optimism that recession in the US can be avoided as recent macro indicators show modest but positive improvement.

The key day to validate or dent that renewed optimism this week will likely be Tuesday as important US and EU data will be updated. Still, given the volatility seen since early summer and the propensity for surprises, the prudent approach remains one of caution even as the respective Greek and Roman Gods of happiness smile on markets at the start of a new week. Better start in Asia. Asian markets reflected the renewed sense of optimism with a strong start to

Another step towards WTO. Russia and Georgia signed a bilateral agreement in Geneva yesterday that removes a major obstacle to Russia’s entry into the WTO in mid December. The Russia-WTO working group meets in Moscow today and tomorrow and is expected to also finalize outstanding issues ahead of the December Council meeting. Also in Moscow today (or tomorrow) Prime Minister Putin will meet with members of the Valdai Club and is expected to emphasize Russia’s determination to improve investor and business conditions in the country. Elsewhere today, the weekly US jobless claims report can often affect investor sentiment. The ECB publishes its monthly economic report for November and that will hardly provide any encouraging words for investors. ENRC will publish 3rd Qtr production data.

Trading – Moscow: Moscow’s bourses yesterday opened with a net gain as a reaction to the encouraging Chinese inflation and macro data. But, as was the case everywhere, the mood quickly changed as Italian bond yields rose. Both MICEX and the RTS slid through the session for the former to end 4.2% lower and the latter to finish with a loss of 3.3%. Sberbank was the best of the blue chips in recent sessions so not surprisingly took the brunt yesterday. It’s shares lost 6.6% on MICEX. VTB ended 4.1% down. Another reason for bank sector weakness is the fear that the ruble will reverse its recent positive course in the face of global risk aversion. Yesterday the ruble just about held onto a gain (+1 basis point) against the dollar as the MICEX session closed.

By Andrei Skvarsky.

Raiffeisen has no plans to follow its European counterparts by retreating from or retrenching in Russia, the Austrian lender’s top spokesman, Michael Palzer, tells EmergingMarkets.me.

AS: Russia’s Sberbank is said to be eyeing the Russian assets of crisis-hit European banks, hoping to buy them cheaply. Has it offered to buy your Russian subsidiary?

MP: We consider our Russian subsidiary a key strategic layer and it is our largest profit contributor: ZAO Raiffeisenbank earned a profit before tax of EUR 206 million in the first half of 2011. I don't see any reason why we should sell consider any buying offer, however, I am not aware of such an offer.

I also would like to stress that we have already faced one crisis in Russia that we managed to get through together with our customers. Back in 1998, Raiffeisen decided to stay in the market and to even recapitalise its Russian bank - at a time when other banks decided to leave the market.

AS: Are you losing a market share in Russia to Sberbank and the other state bank, VTB, or have you picked up business from foreign lenders such as HSBC that are pulling out of Russia?

MP: Our position remains stable, and we are

By Chris Weafer, Chief Strategist at Troika Dialog.

 The weekly equity funds flow report from EPFR Global showed a big jump in new investment into emerging market funds for the week ended Wednesday. A total of $3.5 bln was invested into all EM funds compared to $1.0 bln the week before.

Russia dedicated funds reported their first week of inflows since early July, directly raising $56 mln in the current week compared to a loss of $54 mln the week earlier. However, on an aggregate basis when taking into account

By Daniel Salter, Head of EMEA Equity Strategy at UniCredit Securities. Russia is by far the largest global economy outside the WTO. Entry negotiations have been going on for eighteen years, since Russia applied to join the WTO’s predecessor, GATT, in 1993. However, after numerous false starts, progress appears to have accelerated recently – we could see an announcement as soon as December this year. A positive decision would be good news for growth and investor sentiment in Russia..

By Andrei Skvarsky.

Russian stock traders may as well swing hammocks in their offices if the top brass of the country’s financial services sector go ahead with their initiative to extend trading hours at the Micex stock exchange until 11pm.

The proposal is under discussion between Micex and the Central Bank, according to Interfax.

Recently, Micex moved back the closing time of its trading sessions to 7pm, and last month news came that Micex and RTS, the other key bourse, would stay open for most of the national 10-day non-working period in early January.

Yawning and bleary-eyed traders will hardly me of much help in bringing the Kremlin’s ambitious plan to turn Moscow into an international financial centre into reality.

Bankers have mixed feelings about the measure. Here are some of the comments:

Luis Saenz, chief executive, US unit of Otkritie:

Proposed extended trading hours for the consolidated Micex/RTS group - at least through the New York Stock Exchange close - would be welcomed by international investors. But the time changeRussiahad on Monday and the LESS trading hours as a result clearly is a major negative frowned upon by international investors. I don’t see how this is in line withMoscow’s aspirations on becoming a financial center - in fact, it’s precisely the opposite. I believe Micex will continue to lose liquidity to LSE and other exchanges as a result of the less trading hours for international investors.

Leonid Slipchenko, banking analyst at Uralsib Capital:

“We think there is no impact on us or on the markets as I know RTS has evening sessions till 11pm now and there is no liquidity, big players or big deals. So we’ll get a similar situation. No reason to worry much.”

Slava Rabinovich, chief executive and chief investment officer, Diamond Age Russia Fund:

“Generally, the more trading hours each security has, the better liquidity and price discovery, although the utility of this statement might not be 100% strong if we are talking about such wee hours, when most of the planet is either going to sleep or is still asleep or is just waking up.”

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