CONCLUSION: While certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.
If you are also using this latest no-volume melt-up to sell/short into, then you’re likely on the same side of the coin as us with respect to global growth – specifically that it is likely to continue slowing over the intermediate term in the face of potential negative catalysts such as the Fiscal Cliff/Debt Ceiling Drama in the US, a resurgence of European sovereign debt risks and/or an incremental round of tightening in the Chinese property market.
If we are indeed in a 2007-esque perch atop lower-highs across many equity markets globally, then perhaps consensus is right: the bull case is, in fact, bailouts. Much like valuation for single stocks, we do not anchor on stimulus as the deciding factor for any thesis on a country’s equity market. Rather, we try to identify opportunities where expansionary POLICY can lead improvements in a particular economy’s GROWTH outlook without materially compromising the INFLATION outlook. Reflexivity remains core to our fundamental research process.
In that light of this process and our negative intermediate-term fundamental outlook for global economic growth, we decided to score countries based on a few key metrics to determine which of them had the most/least space to stimulate going forward. It’s important to note that this score does not replace our policy expectations for each county in the sample, as those individualized conclusions continue to be driven by our forward-looking G/I/P framework and real-time market signals. Nor is it an attempt to predict who’s going to announce incremental stimulus efforts over the intermediate term. Rather, this is our best first attempt at determining which countries have room to stimulate the most/least without imposing incremental risk upon their currency and bond markets.
For the 17 countries in Asia and Latin America we were able to find comparable data sets for, we gathered 10yrs of sovereign budget balance and debt metrics (as percentages of GDP; annual) as well as TTM YoY CPI readings. Secondly, we statistically analyzed each data set to determine where the latest data point was relative to its mean from a standard deviation perspective. Lastly, we tallied each of the three metrics together for each country, inverting the debt/GDP and CPI readings (i.e. higher values here should be interpreted negatively).
As the table and chart below show, there’s a sizeable discrepancy between those countries with the most space and the least space in our sample. The median score of 0.58 points pales in comparison to the 6.89-point delta between the country with the most room to stimulate (Peru) and the country with the least space (Mexico). While certainly not to be used as a one-factor investment thesis, we are pleased to see two countries we’ve been most positive on in recent quarters (Philippines, Thailand) on the right side of the latter chart and outperforming in the YTD, while two countries we’ve been most negative on recently (Australia, Japan) on the left side of that same chart and underperforming on that same duration.
Moreover, the country-level micro data points support our findings as well: Filipino policymakers are planning an incremental $16 billion worth of investments on roads, schools and airports and ruling Thai policymakers are looking to continue spending upwards of 11% of their federal budget on their 1yr-old rice price-fixing scheme, designed to inflate the incomes of the country’s farmers. Conversely, Australian policymakers are currently implementing the largest fiscal tightening since at least 1953, while Japanese policymakers have recently passed a contentious VAT hike bill – the first of its kind since 1997.
All told, while certainly not a credible bull case in and of itself, we do think it’s important to contextualize which countries have the appropriate space to stimulate economic growth over the intermediate term – especially in light of the concerns we continue to have with respect to the outlook for global economic growth.