Jim O’Neill – Het draait allemaal om Onderwijs

A generally calmer week for financial markets as we all ponder the usual issues. Lots of interesting bits and pieces to focus on but my theme for this Viewpoint follows up on an issue I touched on last week: the importance of education. Post my Asia trip, in my discussion about China being more about ?quality’ than ?quantity’ going forward, I made reference to the views of an OECD researcher who cited Shanghai schools as now being at the leading edge compared to any OECD member countries. This week I encountered more stories about education in the Growth Markets, especially China and India. More about this below, but let me run through some of the latest data releases first.

Some Modest Pick up in Momentum.

As evidenced by the Goldman Sachs Global Leading Indicator (GLI), which showed a modest improvement in September, a number of important data points positively surprised. Each of the China, Euro-Area and US manufacturing PMI’s showed improvements. Within the US release, the split in the inventory to new order components showed a welcome improvement. The US Services Sector ISM also improved, and as far as the Euro-Area PMI’s were concerned, if it wasn’t for the French weakness, the bounce in September would have been more notable. Italy’s in particular showed a welcome rise.

While improving PMIs were not universal around the world (the UK slipped back again after a large bounce in August), there were a couple of other better data points to note as well. Korea, always the first country to report its trade data, showed weak exports, although with a better sequential improvement than expected. Concerning other data, it was good and interesting to see that industrial production in Brazil rose by 1.5% in August, more than was expected. There were also upward revisions to months back to April suggesting that the degree of weakness was less than previously thought. In a special Brazil feature this week, the Financial Times sounded a bit less gloomy about Brazil, highlighting some of the recent positive policy developments.

Changing Dynamics in the US.

In addition to a generally rising recognition that the housing market is on the mend, there was an interesting anecdote about the ongoing dramatic change in the US energy industry. On Thursday, the Financial Times reported that US coal exports had risen by 24% in the first half of 2012 with Europe responsible for half of that demand. The article suggested it was a by-product of the drop in domestic energy prices linked to the shale gas and oil developments. Who would have thought? US coal exports on the rise.

There were also a number of articles circulating that efforts are underway to reach a deal on the ?fiscal cliff’. A number of them suggest it is possible that something could be agreed soon after the election. Not that this was apparent from the first televised debate between Obama and Romney, with Romney surprisingly putting in a strong showing. Maybe this dynamic is in the process of shifting too? We shall see.

Soul Searching in the UK!

Tuesday of last week I was invited to a lunch of an important right-of-centre think tank with a good 20 plus others, most of whom were various grand names and influencers of the Tory party of either today or yesterday. The topic of the lunch was ?in need of a new idealism’ and was kicked off by a brief video and opening salvo about the problems of capitalism (and of course at such an establishment, the flaws of socialism). I was asked to start the discussion, which I responded to by suggesting I wasn’t really sure why they were coming at it the way they were. My specific comment was that we are witnessing ?adaptive capitalism’ which, from what I can tell, is how it has been for quite a long time. Indeed this is how it was during Maggie Thatcher’s time too, even if some might want to romantically think differently. In the subsequent discussion, some others touched on the education theme and why this is a big growth area for the UK given the quality of our top Universities which I will come back to later. The overall mood of the lunch added to my belief that to both understand and prosper in this dramatically changing world, sticking to rigid ideological beliefs is not an advantage.

Quality Versus Quantity Around the World.

In this context, on Wednesday, I presented to the financial arm of a major global company in Switzerland who demonstrate exactly the sort of ?adaptive capitalism’ that I believe will prosper, and all the qualities that the ?new China’ and other rising wealth nations from the Growth Market world are hungry for. The growth potential of such international companies remains vast in my opinion.

Tangential to this, The Economist carried an extremely interesting feature about the world auto market last week. Rather than emphasising the ongoing huge structural growth in the Growth Market world (which is still ongoing), the article focused on the possibility that in the ?west’ autos are losing their fashionable status. It suggests this is due to the rise of the internet, improving urban public transport, fuel costs, etc, and that perhaps the unthinkable is conceivable: the western aspiring classes can find other things than an auto to symbolise their wealth, leisure and pleasure.

The US exporting coal? Western citizens falling out of love with the auto? Still want to be bullish oil prices? Take a look at the 5-year chart which has peaked, as I’ve said before.

Another interesting story that caught my eye in this context was a Financial Times report that suggests the latest medium-term projections from the Russian central bank now project a shift in its balance of payments current account deficit by 2015. The article goes on to discuss whether this prospect will in fact be a major influence in forcing Russia to reduce its dependency on oil prices and the energy business, and in addition force President Putin to undertake the big changes on corporate governance and the rule of law that so many believe must happen for Russia to prosper on a more even and stable footing.

A Couple of Other Bits and Pieces.

Against most expectations, the Reserve Bank of Australia (RBA) cut interest rates this week, adding to my belief that the A$ is heading back below parity against the Dollar.

In Japan, yet another new Finance Minister appeared on the scene and one wonders (how many times can one persist with this!) as to whether this one will try and do something more forceful about the ridiculous strength of the Yen?

And so to the Growth Markets and the All Important Education

I received an interesting phone call this week from a German individual who is currently the CEO of a Russian high-tech type fund in the US. We had been on a conference together a few weeks ago and failed to find the time to chat afterwards. He wanted to take me to task about the Growth Environment Scores’ (GES), the index GS calculates, and their ability to demonstrate sustainable growth and productivity strength – or the lack of. In contrast to virtually every other discussion I had on this topic with respect to Russia, he believes that some of our component scores for Russia are too low, especially for areas such as the rule of law and corruption. It was fascinating to hear, and his arguments sounded reasonably plausible suggesting that Russia is only really bad in the highly visible areas, such as energy industries. For good measure, he mentioned that education standards are better than some of the other BRIC economies, which indeed our GES Scores do show.

Which brings me to China and education, once again. This week’s English speaking Nikkei newspaper carried a fascinating article about the Chinese thirst for overseas education. It stated that a number of internet companies are offering access to top US and other Western Universities such as Harvard for free. In addition to what I reported about the views of the OECD last week, the race to be well educated in China continues and, as I mentioned at the London soul searching lunch, remains a massive opportunity.

Which brings me to India. The Economist on September 29th carried a fascinating special on India entitled ?Aim Higher’. I love that title and advice for India. There were many fascinating things that I noted, some of which I shall highlight here. The piece encouraged policymakers to regard the recent steps to allow more investment into retail and airlines as a beginning (this week, there have been rumours of steps to allow FDI in the insurance industry to increase to 49%). The article also focused on different aspects of India’s ?big picture’ challenges.

On demographics and urbanisation, they stated that latest data showed ?only’ 377 million people currently live in cities, and some 833 million are still in rural areas. This section then went on to discuss many of the challenges India will face as it urbanises, citing the city of Surat as one of the few that are perhaps getting it right.

In terms of the labour markets, and hence my title this week, another section discusses the staggering shortages of qualified people in key areas. For example, today India has 500,000 engineers and it needs 4 million. It has 45,000 architects and needs 366,000. While the literacy rate has supposedly risen from 52% in 1991 to 74% today, it is still incredibly low. A Bihar state MP was quoted suggesting that India needs an additional 4 million school teachers, and a staggering 8 million need to be retrained. To help achieve this, government spending on education is increasing to 18% this year. The needs and opportunities in higher education are just as dramatic, with India likely to have more than 10% of the world’s graduates by 2020.

I have discussed a number of education-based charities in the past including Teach for All and Teach for India. In the spirit of the title of The Economist India piece, ?Aim Higher’, how about the Indian authorities in their new found zest for reforms set a goal of having 1 million Teach for India teachers by 2020? In the coming years, when they might not have the internal capacity to train or even house them, here’s another mad idea. Why not hire 100,000 teachers from the UK, US and elsewhere to simultaneously help reduce some of our shamefully high levels of youth unemployment and provide the expertise to India immediately (especially for English speaking)?

In the meantime, back to the markets. Enjoy the continued creep up in equity markets. One of these weeks, some of you might believe it is for real! The world is quite a decent place.

Jim O’Neill

Chairman, Goldman Sachs Asset Management.