For much of the past year, the trade-off between growth and inflation has been foremost in the minds of emerging market investors: how would policymakers balance a need to react to rising inflationary pressures with the domestic imperative to keep growth rates high? And what impact would such decisions have on equity, credit and currency markets?
But official data – industrial output, retail sales, production managers indices and the like – have offered only isolated snapshots of the pace of economic activity across key emerging markets. Such data, if reliable in the first place, also cover disparate time periods, making it difficult to judge the impact of policymaking and to position trades accordingly.
This is where Bank of America-Merrill Lynch’s real-time EM indicators come in. The BRICycle combines daily, weekly, monthly and quarterly economic indicators to provide a real-time snapshot of economic activity. It has demonstrated an impressive correlation with GDP growth in the relevant countries, as well as with the MSCI EM equity index and commodities.
Alberto Ades and his EM research team updated the index’s methodology in February. The result has been an increasingly sought-after tool for EM investors looking to gauge how policy is impacting economic activity.
It’s just one of a number of sophisticated econometric models the bank has rolled out. The FX Compass identifies currency movements and the extent to which EM currencies are undervalued or overvalued against the US dollar; the bank’s number-crunchers have also developed a sophisticated model to measure the impact of rising global commodity prices on emerging market inflation; the verdict: a 30% increase in commodity prices raises average inflation by 160 basis points after two quarters.
Of course, the past few years have highlighted the dangers of overreliance on statistical models. But by combining market-leading econometric innovations such as the BRICycle with strong qualitative analysis of macro and policymaking conditions across emerging markets, BofAML’s research offering has become a necessity for EM-focused fund managers and investors.
The bank correctly forecast that while higher food prices this year would result in rising inflation and call for further policy tightening across most emerging markets, policy action would have little negative impact on global emerging market economic activity, which has generally held up across the Bric economies.
In a report published in mid-March, amid soaring oil prices and widespread anxiety, Ades and Rudy Loo-Kung suggested that oil prices would likely only have a 13 basis point negative drag on 2011 real GDP growth across emerging markets. Downplaying the oil price risk seems to have been the right call.
The bank’s analysis of the crossover between emerging and developed markets has also been strong: its in-depth two-part series on sovereign debt defaults, Lessons from Brady, drew on the wealth of experience of sovereign debt restructurings in emerging markets to address the challenges facing the peripheral eurozone. As such, it offered EM and non-EM investors alike a series of possible scenarios for how eurozone restructuring could play out.
For the overall scope and quality of its research offering, it is hard to look past BofAML’s continued strong performance in the EM research space.
But for fund managers surveyed by Emerging Markets, BofAML’s main rival in terms of the breadth and quality of qualitative and quantitative research over the past year has been JP Morgan. The strength of its legacy data and econometric models, overlaid with thoughtful analysis from emerging markets research head Joyce Chang and her team, have received widespread praise.
Jonathan Anderson at UBS – through his EM Daily, EM Focus and EM Perspectives series – also continues to offer up thought-provoking and consensus-challenging reports, providing a constant drip of trading ideas and theses for investors.
Among the themes he’s tackled: that the real investment dichotomy this year lies not such much in EM versus DM, but between EM exporters versus commodity importers; that China’s “shadow” banking sector poses a major systemic risk to the world’s second-largest economy; if DMs lose another percentage point of growth momentum in 2H 11, EM will also lose a percentage point but will continue to grow 4–4.5 percentage points faster than the developed world; and that the continued outperformance of EM bond markets vs equities points to the fact that markets are running scared over global economic prospects, but not over EM specifics.