Dmitry Ivanter has been appointed as the Chairman of VTB Capital Investment Management Executive Committee. The Committee is tasked with the strategic and operational governance of VTB Capital’s Investment Management business, one of the three main arms of VTB Capital’s business.

The VTB Capital Investment Management Executive Committee consists of a Chairman, Global Head of Portfolio Management, Global Head of Private Equity, Global Head of Venture Capital, CFO and COO. Previously Mr. Ivanter was COO of VTB Capital Investment Management. He will retain all COO responsibilities until such time as a suitable successor is appointed.

Under Vladimir Androsik, the Investment Management business increased from RUB 13.6bn in mid-2010 to RUB 79.9bn by the end of 2011, with all business lines growing faster than the market. After a year and a half of successfully leading the Investment Management business at VTB Capital, Vladimir Androsik is transferring to take a strategic leadership role within VTB Group.

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!

Sberbank of Russia and Troika Dialog announce the closure of the deal to merge the two companies. This landmark event signals the creation of the largest universal banking institution in Russia.

The integration of Troika Dialog will enable Sberbank to reach a new level of client service through high-quality financial consultation and a broad choice of investment strategies, underpinned by a full range of modern financial instruments – from the Bank’s traditional credit products to complex investment banking and global markets products. An undisputed regional market leader will emerge as a result of the merger of these two complementary businesses.

As part of the process of integrating Troika Dialog into the Sberbank structure, a new division is being created: the Corporate Investment Bank (CIB) which will provide services to the largest Russian and foreign corporations and financial institutes. CIB will become part of the business unit entitled “Corporate Business” managed by Andrey Donskih, Deputy Chairman of the Management Board of Sberbank of Russia. Alexander Bazarov, Member of the Management Board, Vice President of Sberbank of Russia and Director of the Corporate Clients Department, and Ruben Vardanian, CEO of Troika Dialog have been appointed Co-heads of CIB.

The second area of business being created as a result of integration is Wealth Management. Wealth Management will include the business areas which focus on selling investment products to private clients, including Asset Management and Private Banking. Ruben Vardanian, Troika Dialog CEO, will head Wealth Management; Bella Zlatkis, Deputy Chairman of the Management Board of Sberbank of Russia, will oversee this business unit. The unit’s development plans include the creation of the largest private bank in Russia, leveraging western experience of developing product lines and client service technology.

According to preliminary data for 2011, the divisions of Sberbank and Troika Dialog together generated 22 billion roubles of income from operations made on the financial markets, out of which 8 billion roubles came from securities sales and trading operations, and 6 billion – from conversion operations and precious metal operations. In 2011 investment banking services generated preliminary income of 3.4 billion roubles. The Bank plans to significantly increase income generated by these segments after the teams are unified, which will happen in the immediate future.

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.

Makram Abboud has been appointed as CEO Middle East & Africa and Co-Head of the International Multi-Product Origination and Distribution group for VTB Capital plc. In both these roles, Makram will be responsible for the development and implementation of VTB Capital’s International Client Franchise strategy internationally and in MENA, where VTB Capital’s goal is to be one of the leading investment banks in the market. Makram has almost 20 years experience working in senior roles in investment banking, covering both the Middle East and Emerging Markets. Prior to joining the VTB Capital team, Makram Abboud was Head of Emerging Markets at Nomura Holdings Inc.’s emerging markets team across sales and origination. Before that, Makram both developed and led the emerging market and Middle East capital market sales franchise first at UBS and then at Merrill Lynch, where he delivered exceptional growth to their respective franchises. Makram Abboud graduated from the McGill University School of Management, Montreal. He is also a Certified Public Accountant accredited by the American Institute of Certified Public Accountants (AICPA), Virginia, USA.

Philip Hamilton has been appointed Head of VTB Capital’s Global Fixed Income Flow Sales Group. The Group was formed following the strategic realignment and enhancement of VTB Capital’s Global Markets Sales & Origination structure.

Philip will be responsible for managing and growing VTB Capital Fixed Income flow distribution franchise with Russian and international clients.

Over the last 20 years Philip has had several senior Emerging Markets roles. Prior to joining VTB Capital, Phillip was the Head of EM Product Sales at Goldman Sachs for the CEEMEA region. Before that he was the Head of EM Sales at Merrill Lynch and Dresdner Kleinwort. He also headed trading and sales for ING Barings in London and Asia.

Philip Hamilton will be based in London and will report to Vitaly Bouzoveria, Global Head of Fixed Income.

 Vitaly Bouzoveria, Head of Fixed Income Sales & Trading at VTB Capital, said: “Philip has an extensive experience working for key global financial institutions, with a key focus on Emerging Markets. This appointment will help us to extend our client base and further develop our leadership on global markets”.

Troika Dialog today announces the appointment of Maxim Safonov as Head of Fixed Income, Currencies and Commodities Division. Maxim will join Troika Dialog on January 10, 2012 and reports to Rob Leith, Global Head of Investment Banking and Global Markets.

Maxim brings over fifteen years of experience in investment banking, specialising in Russian capital markets, based in both Moscow and London. Prior to joining Troika Dialog, he was a Portfolio Manager at Finisterre Capital, Emerging Markets specialised hedge-fund, where he was responsible for FX and rates strategies. Prior to that Maxim led HSBC’s efforts to re-establish its presence in Russian financial markets, joining the bank in 2004 as Head of Markets in Moscow, then later moved to London as Regional Head of Trading for CIS where he created one of the strongest regional trading franchises.

He began his career as a fixed income trader at ING Bank in Moscow before rising to Head of Financial Markets and Deputy Chairman of the Board, where he had overall responsibility for the financial markets business in Russia.

Troika Dialog announced the appointment of Ovanes Oganisian as Strategist. In his new position, Ovanes will work closely with Chief Strategist Chris Weafer to provide insightful analysis for Troika Dialog’s client base on what promises to be another fascinating period for Russian and CIS equities.

Ovanes comes to Troika Dialog with over 15 years of financial market experience, most recently completing a decade at Renaissance Capital as an equity strategist. Prior to that he was involved in a number of successful start-up businesses in the financial and technology fields, having originally started his career as an equity analyst for both international and domestic houses.

At Renaissance Capital, Ovanes was responsible for building the domestic client franchise and its quantitative models, and this will also be one of his key responsibilities at Troika Dialog. Throughout his time at Renaissance, his team regularly traded places with Troika Dialog’s own strategists for the top slots in the benchmark Extel and Institutional Investor surveys.

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

Sticking with my theme of trying to be pragmatic, the first week of 2012 closed with, on the one hand, a few highly interesting developments, and on the other hand, a sense of 2011 déjà vu, especially as it relates to Europe.

Following the tone of my Jan 3rd Viewpoint, I shall be watching the Monday evening close of the S&P very closely to firm up or reject my current biases. More on this below.

The US. Virtuous Improvements Starting or Another False Dawn?

Following an encouraging December manufacturing ISM index, December payrolls contained many positive signs as well as the complementary household survey reporting another drop in unemployment. For many obvious reasons, an improving job market in the US is vital to a number of related topics. This would include the political strength of President Obama and the mood of policymakers.  However, most importantly, an improving job market would create the conditions for some continued strength in consumption without requiring a further unsustainable decline in the personal savings rate.

Having been on the positive side of the cyclical arguments about the US since early last year, and then a bit baffled as to why so much momentum suddenly disappeared last Summer, this improving mood is not a surprise to me. A lot of ingredients are present for a more vigorous recovery than the consensus is currently forecasting, and indeed, considerably more than our current 2.2 pct GSAM forecast for 2012 GDP.  Many reliable coincident and short-term leading indicators are showing promising signs, including the ongoing trend in weekly job claims. Moreover, it seems to me that there are good signs on a couple of major structural issues that have hung over the US also. One is the housing market.  And, even without the continued promptings of some US policymakers, such as NY Fed President Dudley last week, a modest turn in the housing market in 2012 could contain a number of virtuous ingredients, including helping the fortunes of major US banks. The second is the changing dynamics of the energy markets, with more signs of deliverable and usable domestic oil and gas supplies, which could also be highly significant for further improving the US balance of payments current account.

Against all of this optimistic thinking, there are many reasons why the recovery could falter once more, including the possibility that some of the reported improvements are due to less inclement weather in late 2012 than usual, the fresh decline in the savings rate, and the more populist and familiar gloomy issues related to de-levering and the government’s fiscal affairs. Of course, there is the widespread belief that, at some point, the European mess is going to have much bigger negative consequences on the US than what is apparent so far.  But I am increasingly inclined to think that the 1997 parallel with the Asian crisis might be valid, i.e., due to easier overall financial conditions – for the US – the crisis might indirectly help the US recovery rather than harm it. If, however, the worst path for the Euro Area comes to pass, then it will hurt the US.  But at this point, those relying on that factor must perhaps even be hoping that this comes true.

Currently, it seems to me that the consensus is going to have to contemplate a year with close to or above trend growth for the US, and a repeat of December’s data pattern in January would probably cause that change.

Asian Signals Unclear.

Against the clearly better marginal signs in the US, the same cannot be concluded from Asia. While the December Chinese manufacturing (and services) PMI positively surprised, as I mentioned on the 3rd, it is conceivable that this might be distorted due to the early Chinese New Year coming up and businesses front-loading activities before the usual shutdown. I am sure that if the Shanghai stock market hadn’t opened the year in such a gloomy mood, I might not have given that theory as much credence, but the continuation of the weak December equity market performance suggests something doesn’t seem so good.  Another explanation is that the much-anticipated decline in Chinese consumer price

inflation is not going to happen.  A major client raised this possibility with me late last week. I am in the camp that CPI is heading down back towards 3 pct early this year, but if it reversed its late 2011 sharp drop and started rising back to 5 pct and higher, this would be quite an issue.

Data from other parts of Asia is quite mixed, with Japan looking quite disappointing again, and some softness in various internationally-exposed Asian economies. But against that, the most up-to-date and highly pertinent Asian trade data, that from Korea, strongly surpassed expectations. Korean exports rose by around 12.5 pct year-on-year last month,

nearly twice expectations. As I am fond of saying, unless they are trading with Jupiter, someone around the world is doing ok. The details that are available at this early stage, suggest that while their exports to Europe are weak, this is strongly offset by strength elsewhere, especially to other parts of Asia.

More Signs of Currency Reform in China.

In addition to a second speech from PBOC Governor Zhou about further capital account opening, over the weekend, Premier Wen has indicated that China will undertake more reforms including enhanced flexibility of the Yuan. This is both cyclically and structurally a key issue for all of us, and consistent with my ongoing assumption since last Summer that full convertibility – at least Chinese style – could be upon us by 2015.

And As For Europe?

Most of last week’s disappointments came from Europe predictably, although in terms of data, it has not all been one way. Indeed, quite a lot of the German data continues to positively surprise. While their highly volatile factory orders fell sharply in November, the December data to date has been better, including both auto sales and unemployment and, inline with the earlier reported better-than-expected December IFO, the latest German PMI positively surprised.

There was also a somewhat pleasant surprise with the release of the much better-than-expected December services PMI in the UK and combined with slightly better-than-expected manufacturing and construction PMIs, this raises the possibility that the UK is not as weak as the very grim mood. There is also more and more positive evidence emerging about auto construction in the UK, much of which is earmarked for export. Perhaps the UK is creeping down the path of underlying adjustment more than many realize?

A number of the obvious weak spots of Europe were disappointing PMIs but, to support my oft stated judgment that people shouldn’t exaggerate the global aspects of the deep crisis many are facing, as I had already mentioned on the 3rd, December’s global PMI rose to 50.8 from 49.7.

The real disappointment relates to the ongoing performance of many Euro Area financial markets, and certainly in recent days, the fresh weakness of European banks equity value.  Following the late 2011 generous ECB 3-year money market activities, this suggests that investors don’t believe the funding support is going to help the earnings capabilities of troubled banks.

In addition, the reported Spanish news that their budget deficit is around 2 pct higher than previously reported, together with plans to tighten fiscal policy, further highlights the questionable core cyclical tactic of many struggling Euro Area economies. I have some sympathies with this view. While it is so fashionable to regard the Euro Area crisis as a sovereign budget deficit and debt crisis, until the 2008 collapse and their own housing market reversal, Spain’s fiscal position was the strongest of the big 5 Euro Area economies. What Europe needs is more growth, and a European Monetary System that is credible and attractive to private sector investors.

It remains to be seen whether the changing of some key individuals on the ECB board will be relevant in this regard, but I am touch surprised that this is not receiving more commentary. While the replacement of Stark with Rasmussen at the start of 2012 was known, it was not expected that the leadership of the Economics research would shift away from a German head. It has been given to Peter Praet, the Bank of Belgium member, which may or may not be interesting. It certainly seems that President Draghi is going to do things his way.

So What About Markets?

There are two things which are potentially quite interesting about the markets, but we will need more evidence. In addition to the S&P 5-day rule (more below), there is some extremely tentative evidence that this weird risk on/risk off correlation between the Dollar and US economic news could be changing. The prevailing pattern since 2008 where the Dollar drops on better-than-expected US economic news and rises on disappointing news certainly didn’t pan out last week. If this is the start of the renewal of the more normal historic trend, this would be a fabulous development in my view, as it should make investment decisions more logical, if not easier.

As far as the 5-day rule I discussed as important for me at least, Monday’s close in New York will be the 5th day. After 4 days, the S&P closed up by 1.6 pct year-to-date, but given the fun and games since last Summer, this is easily reversible in a day.

I have found myself quite engrossed in analysis, discussion and debate about this somewhat odd rule in recent days, not least of which because Jose Ursua from the GS Economics, Commodities and Strategy (ECS) department devoted a daily commentary to the topic on Thursday, and subsequently explored it further at my prompting, as have a number of other poor souls including James Wrisdale, and another colleague from GSAM, Rob Hinch.

I first came across this notion from the Stock Market Almanac, and my 2012 edition has been more heavily turned over in the past couple of days than it normally would. It taught be two things many years ago.  One, that there is remarkable pattern historically that many major stock markets show very strong performance from November through April, and quite often, quite weak performance from May through October (hence the “sell in May” oft discussed notion). Any investor that stuck to this calendar investing pattern  would dramatically boost his returns. And two, when the S&P rises after the first 5 trading days of a new year, the market has a pretty good annual performance. In fact, the Almanac claims the success rate has been just under 87 pct since 1950. Jose studied a broader 5-day rule as well as the “January month” rule in his daily and showed that, for a number of markets, the January factors seemed to be quite powerful, albeit less than I had believed, and not enough to dismiss the superior importance of fundamental analysis.

While I certainly concur with the latter, in fact, the Almanac observation appears to be very strong on additional analysis; it is not useful when the 1st 5 days show a decline.  Historically, this appears to offer no concrete signs for the year.  In fact, those years are close to 50/50 as to whether the markets are up or down. (There have been 22 of them since 1950.) It is only really powerful when the S&P is up after the first 5 days. As I reported on January 3rd, 2011 was a real oddity, as it became just the 6th year out of 39 years when the rule didn’t work. What is especially interesting is that there have been no back-to-back years when the rule hasn’t worked. So if for some reason, the S&P is still in positive territory on Monday evening, I shall be most excited.

There is an even more important historical statistic that is exercising me, and millions of others, about a certain Red persuasion this weekend. United have not lost 3 consecutive competitive games since 1997, and those noisy neighbours have a chance to repeat that feat this Sunday afternoon.

Good luck.

Jim O’Neill

Chairman, Goldman Sachs Asset Management

Damian Chunilal, Chief Executive Officer, VTB Capital Asian unit

 Damian Chunilal has been appointed as CEO Asia for VTB Capital and will be based in Hong Kong and oversee the strategic development and further acceleration of the company’s expansion in financial markets across Asia.

Mr. Chunilal will report to Atanas Bostandjiev, CEO, UK and International for VTB Capital.

Damian Chunilal has more than 20 years industry experience, including over 19 years in senior roles at Merrill Lynch, both in Hong Kong and London. Prior to joining the VTB Capital team, Damian was a member of Merrill Lynch's Global Operating Committee and a Managing Partner. The business was focused on M&A, capital raising and corporate finance activities with corporate, sovereign and financial institution clients in Japan, Australia, India and Asia. Damian Chunilal graduated from the University of Cambridge, U.K. He holds a master’s degree in Economics.

VTB Capital officially launched its Hong Kong office on 15 November 2011. In June 2011, the Hong Kong Securities and Futures Commission issued VTB Capital Hong Kong Limited with a license to execute investment banking services. This license permits VTB Capital Hong Kong Limited to undertake dealing and advising on securities activities.

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.

Dear Readers,

EM.me is currently on reconstruction. At the meantime we might occasionally publish views and opinions of market participants but aim to be back, fully operational, early next year. Have a great Christmas Holidays and look forward seeing you soon!

Best regards, EmergingMarkets.me Team

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.