As the Bank of Japan ramps up its monetary stimulus to include buying equities, Jim O'Neill, chairman of Goldman Sachs Asset Management, said it makes sense for central banks to own stocks. O'Neill spoke with CNBC at the Goldman Sachs Growth Markets Summit in New York.
After a survey by RBS was published earlier this month that showed a greater appetite for central banks to invest in equities, "I don't think people should worry about that," said O'Neill. He added that many sovereign wealth funds are tied to central banks and are already investing in stocks.
Earlier this month, the Bank of Japan promised to pump $1.4 trillion into the economy in less than two years to combat deflation through open-ended asset purchases. The central bank said on April 4 that it will more than double investments in equity exchange-traded funds by the end of 2014. The Bank currently holds ¥1.4 trillion ($14.1 billion) in ETFs with a target of ¥3.5 trillion ($35.3 billion) in 2014.
"Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they're not going to ever need it?" O'Neill said. "To help their future returns for their citizens, why would they not invest in equity?"
For individual investors, O'Neill said that "it's a great time to own equities," because the equity risk premium over the risk free rate — a major factor in the widely used capital asset pricing model — is "still so high," despite many fears in the market. "There are many different parts of the world, despite the rally, where I think that is still the case."
O'Neill is best known for coining the "BRIC" acronym in 2001, which points to Brazil, Russia, India and China as the emerging markets to drive growth through the middle of the 21st century.
O'Neill also said the economic landscape is shifting for China as it becomes an increasingly important export market for U.S. companies, who are set to be major beneficiaries.
"It's all about the quality of growth as opposed to quantity. We are in the really early stages — deliberately done — where (China) is prepared to slow growth and shift away to more domestic driven consumption of a more sustainable and better quality," he said. "In this interim phase it's probably going to continue to surprise some people. It's fantastically important."
O'Neill predicts that China will become the second-largest export market for the United States by 2020, overtaking Mexico. "The evidence is shifting that more and more U.S. companies are benefitting from the growth of their consumer," he said.