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The Case for Macro

Our Dynamic Allocation Strategies team explains why global macro investing offers many potential benefits when included in an investment portfolio. Read More (PDF)

Emerging Markets Outlook for 2017

The past 12 months have been fairly turbulent in emerging markets, but a number of factors support emerging market performance.  Read More (PDF)

Macro Scorecard Points to Economic Expansion

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In a previous post, I discussed the role of macroeconomic analysis in our investment process. Today I will show you a tool we use to separate news from noise in a meaningful, interpretable way. We call it our macro scorecard, and it points to solid economic expansion in developed markets and idiosyncratic expansion in emerging markets.

Our macro scorecard currently tells us that developed markets are solidly in economic expansion, that this economic expansion is broadly balanced, and that it looks sustainable.

Scorecard Basics

Our macro scorecard consists of five panels, each of which details a single data series. The first three indicators deal with the supply side of the economy, and the last two deal with the demand side (consumer behavior). These indicators include industrial production, manufacturing purchasing managers' indices (PMIs), manufacturing PMI orders minus inventories, retail sales, and motor vehicle registrations. All of these indicators are high frequency (they come out monthly) and are available at the country level.

For each indicator, we show the annual growth rate as well as the one-month and three-month changes in that growth rate. The idea is to see whether the current rate of growth is decelerating or accelerating.

With the data assembled in this way, our macro scorecard provides an easy, real-time comparison of key economic indicators across most developed markets and a majority of major emerging markets.

Our Current View: Expansion Across Developed Markets…

Our macro scorecard currently tells us that developed markets are solidly in economic expansion, that this economic expansion is broadly balanced, and that it looks sustainable.

How do we know expansion is sustainable? One of the ways we assess the sustainability of economic growth is to look at the growth rates between industrial production volume and retail sales. They are basically in sync without one significantly outpacing the other.

The notable exception is the United Kingdom, where activity is decelerating more on the supply side than the demand side—although this is starting to show up in motor vehicle registrations as well.

…And Idiosyncratic Growth Across Emerging Markets

In emerging markets, growth is more idiosyncratic. This is not surprising. Emerging markets are not one homogenous group; they are different economies with different structures and in different points of development.

Today, more of the major emerging markets are in a position to influence their own economic destinies than ever before and to a much greater extent than at any point in the past five decades. That makes emerging markets an interesting investment opportunity.

As you can see from our scorecard, China is by far the fastest-growing emerging economy. Supply-side growth (particularly industrial production) is relatively stable, but demand-side growth is accelerating from already very high levels. Given China's size, that is no small feat.

Brazil also stands out. It is not growing the most robustly today, but its momentum is turning rapidly, with economic activity accelerating from month to month.

Sustainable Growth in Developed Markets, Idiosyncratic Growth in Emerging Markets

The Indicators

 Industrial production. These figures can frequently move the markets because they are considered to be an indicator of future inflation.

Manufacturing PMIs. This survey-based data provides clues not just about the health of the manufacturing sector, but economic growth in general. Many investors use the PMI as a leading indicator for the growth or decline of gross domestic product (GDP).

Manufacturing PMI orders minus inventories. The most forward-looking component of manufacturing PMI, this data is a testament to how company managers think about their order books versus their current production trends. This gives us a predictable indicator of what future industrial volume growth is likely to be.

Retail sales. Retail sales are an important economic indicator because consumer spending drives much of our economy.

Motor vehicle registrations. Cars are an excellent indicator of consumer behavior. If you don’t have sustainable income growth or credit growth, you are unlikely to purchase such a big-ticket item.