China Consumer Confidence Survey www.riedelresearch.com Riedel Research Group: Leveraging Consumer Sentiment to Navigate Global Equity Markets
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China Consumer Confidence Survey
www.riedelresearch.com
Riedel Research Group:
Leveraging Consumer Sentiment to Navigate Global Equity Markets
GCSILeveraging Consumer Sentiment to Navigate Global Equity Markets
• At the individual country level consumer Sentiment provides a reflection of the underlying health of an economy, when aggregated consumer sentiment can be used to identify the build up of large imbalances in the global economy. The RRG Global Consumer Sentiment Index (GCSI) is based on individual consumer sentiment indexes spanning 28 countries and provides a reflection of the overall health of the global economy. Levels around 0 indicate the global economy is healthy and operating within its equilibrium, levels significantly above or below 0 are indicative of severe imbalances in the global economy.
• In late 2014 the global process of runaway exuberance was triggered due to overly accommodative monetary policies across advanced economies. Currently the GCSI is on a trajectory to reach high and unsustainable levels around 1 by late 2016/ early 2017.
• In great contrast to the exuberant mood across a growing group of economies levels of consumer sentiment across a handful of Emerging Markets (highly dependent on China and commodities) has dropped to very depressed levels. The GCSI has become highly polarized. The current situation is highly unsustainable. One of two scenarios is set to play out as the global economy de-polarizes:
1. Process of global runaway exuberance (triggered by overly accommodative monetary policies in advanced economies) remains in place, GCSI, including consumer sentiment across fragile EMs) rises to elevated levels.
2. Runaway exuberance is derailed due to contagion following crisis’ across a handful of ‘fragile EMs, GCSI (including sentiment across exuberant countries) plunges to depressed levels.
• A play out of scenario 1 is dependent on a stabilization across fragile EMs. Since bottoming at a level of -1.17 GCSI at Risk has recovered to a level of -.74, indicating that economic conditions across the weakest parts of the global economy have started to stabilize. This bodes well for a play out of scenario 1.
• Despite a stabilization across fragile EMs, investors across the globe remain highly concerned over a potential play out of a type 2 scenario and remain wrongly fixated on developments in China.
• Although China’s economy is slowing we see multiple signs that its economic transition is going smoothly as: 1.) percentage of survey respondents saving for potential loss of employment has steadily declined since June 2014 2.) real estate market stabilizes with a corresponding resurgence in optimism among locals regarding the outlook for real estate and 3.) risk appetite has steadily increased since June 2014.
• Providing a further indication of the health of the Chinese economy and more broadly the overall stability of the global economy the RRG Asia ICAM (Internet Consumer Activity Monitor) Index remains at very elevated levels, at 1.57 in February.
• In the current environment we recommend overweighting EMs most exposed to a set of key risk factors (Brazil, Russia, Chile and Malaysia). A play out of scenario 1 would be consistent with a stabilization in across EMs most exposed to the set of key risk factors, resulting in a massive re-rating in the equity markets of the most exposed EMs. A play out of scenario 2 would be consistent with a large scale global crisis. In this scenario the least exposed EMs (which are not already priced for a crisis) have much more downside.
Standardized Change in Consumer Sentiment Since December
Global Consumer Sentiment Index (GCSI)Level of Standardized Consumer Sentiment (January)
Austria
Greece
China
Turkey
Australia
Mexico
Finland
Swden
Estonia
Germany
Japan
Denmark
France
Belgium
Lithuania
Latvia
Argentina
U.S.
Romania
Poland
Hungary
UK
Slovakia
Netherlands
Spain
Czech Republic
Portugal
Italy
-2.25 -1.5 -0.75 0 0.75 1.5 2.25 3
Spain
Turkey
Germany
Denmark
Greece
Netherlands
Argentina
Austria
Swden
Belgium
Estonia
Japan
UK
Mexico
China
Latvia
Australia
Poland
U.S.
Lithuania
Portugal
Italy
Hungary
France
Czech Republic
Romania
Slovakia
Finland
-3 -2.25 -1.5 -0.75 0 0.75 1.5 2.25 3
GCSIRRG Global Consumer Sentiment Index - Identifying Large Imbalances in Global Economy
• At the individual country level consumer Sentiment provides a reflection of the underlying health of an economy, when aggregated consumer sentiment can be used to identify the build up of large imbalances in the global economy.
• The RRG Global Consumer Sentiment Index (GCSI) is based on individual consumer sentiment indexes spanning 28 countries and provides a reflection of the overall health of the global economy. Levels around 0 indicate the global economy is healthy and operating within its equilibrium, levels significantly above or below 0 are indicative of severe imbalances in the global economy.
• Levels near 1 indicate the global economy has been pushed beyond its potential (is overheating). At levels near 1 the global economy has become very unstable. In the below left chart it can be seen that the GCSI reached a level of above 1 in January 2007.
• Levels below -1 are indicative of widespread panic among consumers and investors globally. Following the correction of large imbalances in early 2007 global consumers and investors entered into a state of panic in October 2008.
Global Consumer Sentiment Index Levels of Consumer Sentiment in the GCSI
1
-2
-1.5
-1
-0.5
0
0.5
1
1.5
10/1/
2001
6/1/20
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2003
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2007
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10
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11
10/1/
2011
6/1/20
12
2/1/20
13
10/1/
2013
6/1/20
14
2/1/20
15
10/1/
2015
Panic
Rationally Pessimistic
Rationally Optimistic
Exuberance
0%
25%
50%
75%
100%
11/15
/01
8/15/0
2
5/15/0
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4
11/15
/04
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/07
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9
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1
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3
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/13
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5
Exuberance Rationally OptimisticRationally Pessimistic Panic
Source: Datastream, Riedel Research
GCSI
Process of Runaway Exuberance In 2000’s
• Overly accommodative monetary policy in the US was the main culprit behind the build up of severe imbalances in the global economy in 2007.
• We use a Modified Taylor Rule (using levels of consumer sentiment to provide and estimate of the output gap) to estimate the appropriate policy rate.
• In the below chart it can be seen that our Modified Taylor Rule prescribed a much higher policy rate from early 2005 through late 2006.
• Overly accommodative monetary policy in the US during this period triggered the ‘global process of runaway exuberance’. This process remained in place through August 2007, at which point imbalances (which took the form of a massive real estate bubble in the US) began to correct.
0
0.3
0.6
0.9
1.2
2/1/
2005
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2005
4/1/
2005
5/1/
2005
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/200
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/200
7
Estimated Trajectory Based on Process of Runaway ExuberanceGCSI
GCSI
Process of Runaway Exuberance in 2000’s
Source: Datastream, Riedel Research
2
3.75
5.5
7.25
9
2/1/20
05
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2007
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2007
Fed Funds RateRate Suggested By Adjusted Taylor Rule
2
RRG Modified Taylor Rule Currently Calling For Much Tighter Policies Across Advanced Economies
• In the below left chart it can be seen that coming out of the Global Financial Crisis the RRG Modified Taylor Rule began to suggest a significantly higher Fed Funds rate in early 2011. Since 2011 the policy rate suggested by the RRG Modified Taylor Rule has fluctuated at levels significantly above the Fed Funds Rate.
• Currently the RRG Modified Taylor Rule prescribes a target rate of 4.5%, well above the current rate of .5%. The situation is similar across other advanced economies as well.
• Tail risks from a transitioning/slowing China combined with low levels of inflation have given policy makers an excuse to keep policy rates very low.
• Current levels of consumer sentiment across these advanced economies provide an indication that despite low levels of inflation economic conditions are strong enough to warrant much higher policy rates.
-5
-2.5
0
2.5
5
7.5
10
1/1/19
95
11/1/
1995
9/1/19
96
7/1/19
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2015
Rate Suggested by RRG Modified Taylor RuleFed Funds Rate
US - Fed Funds Rate Compared to Rate Suggested by RRG Modified Taylor Rule
US
UK
Eurozone
Japan
-1.25 0 1.25 2.5 3.75 5
1.8
2.75
3.76
4.5
-0.1
0.05
0.5
0.5
Key RateSuggested by RRG Modified Taylor Rule
Current Key Interest Rates Compared to Those Suggested by RRG Modified Taylor Rule
GCSI
3
Process of Runaway Exuberance Triggered Once Again Due to Overly Accommodative Policies
• In December 2014 overly accommodative monetary policy across many developed countries once again triggered the ‘global process of runaway exuberance’.
• In the below left chart it can be seen that levels of consumer sentiment across the top quartile of countries (in terms of levels of consumer sentiment) reached very elevated levels near 1 in late 2014.
• Due to the spillover effects of overly accommodative monetary policies in advanced economies consumers across a significant portion of the global economy entered into a state of exuberance by late 2014.
• Exuberance in one country can be expected to spread to another through both trade and financial channels. As this exuberance continues to spread the GCSI can be expected to reach very elevated and unsustainable levels by late 2016/early 2017.
• Imbalances in the global economy can be expected to build to unsustainable levels as this process remains in place.
• Since we determined the process of runaway exuberance was in place in December 2015 the GCSI has increased in line with our forecast.
Process of Runaway Exuberance
-0.6
-0.3
0
0.3
0.6
0.9
1.2
8/1/20
13
10/1/
2013
12/1/
2013
2/1/20
14
4/1/20
14
6/1/20
14
8/1/20
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2015
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2015
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2016
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2016
2/1/20
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4/1/20
17
Avg. Level of Sentiment Across All Other CountriesAvg. Level of Sentiment Across Top 25% of CountriesForecast All OtherForecast Top 25%
-0.5
-0.3
0.0
0.3
0.5
0.8
1.0
8/1/20
13
11/1/
2013
2/1/20
14
5/1/20
14
8/1/20
14
11/1/
2014
2/1/20
15
5/1/20
15
8/1/20
15
11/1/
2015
2/1/20
16
5/1/20
16
8/1/20
16
11/1/
2016
2/1/20
17
GCSIForecast
GCSI Trends Match our January 2015 Forecast
This is the trend we predicted in
Jan 2015
GCSI
4
GCSI Has Become Highly Polarized Due to Complications Caused By Transitioning/Slowing Chinese Economy
• As China’s economy continues to transition and slow, political turmoil breaks out in specific countries and the process of runaway exuberance continues, Consumer Sentiment across the globe has become highly polarized as either:
➡Consumers are overwhelmed and begin panicking due to the spillover effects of a transitioning/slowing China and/or political turmoil.
➡Consumers are infected by the spread of exuberance resulting from overly accommodative monetary policies currently being implemented in a majority of developed economies.
• Using a multiple regression model we find that the following factors explain 88% of the variation currently seen across levels of consumer sentiment:
➡Exposure to China as indicated by the share of exports destined for China
➡Political Turmoil: As indicated by evidence of confidence destabilizing levels of political turmoil in countries including Brazil, Chile Russia, Poland Finland Greece and Thailand.
➡Presence of Exuberance: Consumers in countries displaying standardized levels of consumer sentiment near 1 have likely become exuberant.
➡Presence of Panic: Consumers in countries displaying standardized levels of consumer sentiment near -1 are likely in a state of panic.
• In the table to the right details for each of the 4 factors are displayed for a larger sample of countries. Note this sample includes countries that are not included in the GCSI. Many countries that have suffered the most due to a slowing China (namely Brazil) and/or have experienced severe political turmoil (Russia) are not included in the RRG GCSI.
GCSI
%ofExportstoChina
Poli2calTurmoil
Exuberance PanicConsumerSen2ment(January2016)
Brazil 17% 1 0 1 -2.4
Austria 3% 0 0 1 -1.5
Chile 23% 1 0 1 -1.3
Thailand 12% 1 0 0 -0.9
Greece 0% 1 0 0 -0.9
Russia 7% 1 0 0 -0.7
Turkey 2% 0 0 0 -0.5
Australia 36% 0 0 0 -0.4
Finland 8% 1 0 0 -0.4
Mexico 2% 0 0 0 -0.4
Sweden 4% 0 0 0 -0.3
Germany 6% 0 0 0 0.1
Estonia 1% 0 0 0 0.1
Japan 18% 0 0 0 0.3
Denmark 3% 0 0 0 0.3
France 4% 0 0 0 0.6
Belgium 3% 0 0 0 0.6
Lithuania 0% 0 0 0 0.6
Latvia 0% 0 0 0 0.7
Argen2na 7% 0 0 0 0.8
UnitedStates 7% 0 0 0 0.8
Romania 1% 0 0 0 0.9
Poland 0% 1 1 0 1.0
Hungary 2% 0 1 0 1.1
UnitedKingdom 4% 0 1 0 1.3
Slovakia 3% 0 1 0 1.4
Netherlands 2% 0 1 0 1.4
Spain 2% 0 1 0 1.5
CzechRepublic 1% 0 1 0 1.8
Portugal 5% 0 1 0 1.9
Italy 3% 0 1 0 2.9
Key Factors Explaining Variation in Consumer Sentiment Across the Globe
5Source: Observatory of Economic Complexity, Datastream, Riedel Research
Current Situation in Highly Unsustainable - One of Two Scenario’s Will Play Out
• In line with the high degree of polarization in the global economy economic conditions across ‘fragile developing economies’ have diverged close to as far as possible from economic conditions in developed economies. The current situation is highly unsustainable. One of two scenario’s is set to play out as the global economy de-polarizes:
1. Process of global runaway exuberance (triggered by overly accommodative monetary policies in advanced economies in late 2015) remains in place, GCSI, including consumer sentiment across fragile EMs) rises to elevated levels.
2. Runaway exuberance is derailed due to contagion following crisis’ across a handful of ‘fragile EMs, GCSI (including sentiment across exuberant countries) plunges to depressed levels.
• A depolarization of the global economy will be the dominant driver of equities across the globe over the next few years, Identifying which scenario will play out should be among the top priorities for investors.
• A play out of scenario 1 is dependent on a stabilization across fragile EMs.
GCSI Fragile GCSI Exuberant
Brazil Poland
Chile Hungary
Thailand United Kingdom
Russia Netherlands
Greece Spain
Czech Republic
Portugal
Italy
GCSI
Polarization in Global Consumer Sentiment
-1.8
-1.35
-0.9
-0.45
0
0.45
0.9
1.35
1.8
1/1/20
06
6/1/20
06
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2006
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2/1/20
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08
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2008
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2009
3/1/20
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11
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11
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2011
4/1/20
12
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2/1/20
13
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12/1/
2013
5/1/20
14
10/1/
2014
3/1/20
15
8/1/20
15
1/1/20
16
GCSI FragileGCSI Exuberant
Global Economy
Starting to de-polarize with Scenario 1
6
Fragile Emerging Markets Are Stabilizing - Bodes Well For Scenario 1
• Levels of consumer sentiment across the most depressed countries in the GCSI provides a good indication of the health of the global economy. ‘A chain is only as strong as its weakest link’.
• Levels near -1.2 in ‘GCSI At Risk’ (defined as the average level of consumer sentiment across the bottom 20% of countries in the GCSI) provides an indication that economic conditions across a significant portion of the global economy have become extremely unstable. In the below right chart it can be seen that the percentage of countries in the GCSI in a state of panic starts to pick up significantly as GCSI At Risk drops to a level of -1.2.
• Since bottoming in September 2015 (at -1.17) GCSI At Risk has recovered to a level of -.74, indicating that economic conditions across the weakest parts of the global economy have started to stabilize. This bodes well for a play out of scenario 1.
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/02
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GCSI At Risk (Average Level of Consumer Sentiment Across Bottom 20% of Countries)
0%
25%
50%
75%
100%
-3 -2.25 -1.5 -0.75 0 0.75
GCSI At Risk
% o
f Cou
ntrie
s in
GC
SI In
Sta
te
of P
anic
GCSI At Risk and Percentage of Countries In a State of Panic
GCSI
7
-30
-15
0
15
30
45
60
-3
-2.25
-1.5
-0.75
0
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1.5
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2005
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10/1/
2012
5/1/20
13
12/1/
2013
7/1/20
14
2/1/20
15
9/1/20
15
GCSI China FocusSentix Investor Sentiment - Asia Ex. Japan
-30
-15
0
15
30
45
60
-3 -2.25 -1.5 -0.75 0 0.75 1.5
GCSI China Focus
Inve
stor
Sen
timen
t - A
sia
Ex. J
apan
Jan. 2016
GCSI China Focus and Sentix Investor Sentiment Towards Asia Ex. Japan
Source: Sentix, Datastream
GCSI China Focus and Sentix Investor Sentiment Towards Asia Ex. Japan
GCSIDespite Stabilization, Global Investors Remain Wrongly Fixated on China
• As highlighted on the following slides we see signs that China’s economic transition is going smoothly. In line with its transition, China’s economy is slowing. This has put severe pressure on a handful of Emerging Markets struggling to adjust to China’s new economic model. Instability across a handful of fragile EMs (not a slowdown in China) represents a large tail risk for the global economy as a crisis across the group ‘fragile EMs’ has the potential to result in a play out of our scenario 2.
• Due to the complications experienced by the group of ‘fragile EMs’ caused by China’s economic transition investors across the globe have become wrongly fixated on developments in China.
• In the top right chart it can be seen that investor sentiment towards Asia Ex. Japan (which is largely driven by China) recently disengaged from the underlying health of China’s economy (as indicated by the GCSI China Focus, a global consumer sentiment index weighted towards countries most exposed to China).
• As China’s economy came under the microscope in late 2014 investor sentiment towards China began to fall below levels merited by the health of its economy. (A dent or scratch looks bigger under a microscope, similarly implications surrounding China’s transitioning economy appear much worse when scrutinized by media outlets and investors across the globe).
• Following the governments surprise devaluation in August 2015 Investor Sentiment towards China dropped well below levels merited by the health of its economy. Although nothing particularly bad happened pertaining to China’s economy the devaluation resulted in massive speculation that China’s economy was far weaker than already feared.
• Note that the GCSI China Focus has not deteriorated significantly since the surprise devaluation in August, speculation that the move was made in reaction to a potential downturn in China’s economy have proven to be misplaced. 8
Global Focus on China Fuels Negative Media Bias
• The global focus on the slowing Chinese economy has helped to fuel a negative media bias in China.
• In the below chart the CSI is compared with the Adjusted CSI, which filters out the impact that media bias and extreme psychological states of panic or exuberance have on the MNI China Consumer Sentiment Indicator, providing an indication of the true underlying health of the Chinese economy. Divergences between the CSI and the Adjusted CSI provides an indication that consumers responses to survey questions are being effected by media bias and/or extreme psychological states.
• Despite the ongoing concerns over the health of the Chinese economy the Adjusted CSI remains at healthy levels slightly above 0, indicating that although China’s economy is slowing, consumers remain optimistic.
Adjusted China Consumer Sentiment Indicator and CSI
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-1
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0
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2014
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15
12/1/
2015
Adjusted CSI CSI
MNI China Consumer Sentiment Indicator
9
Consumer Sentiment is driven primarily by 4 factors: Domestic economic conditions, external economic conditions, inflation and extreme psychological states of panic or exuberance among consumers.
Using a multiple regression model we have estimated the sensitivity of consumer sentiment to each of these 4 factors.
The Adjusted CSI provides an estimate of the level the CSI assuming that consumers have remained rational.
Current depressed levels seen in the CSI are due to panic among consumers. If it were not for this panic, economic conditions (both domestic and external) and levels of inflation (at 1.8% in January) indicate that levels of consumer sentiment in China would be significantly above the long term average.
As Global Investors Worry, Local Chinese Become More Confident With Job Stability
• Despite the surge in global concerns over the health of China’s economy local Chinese consumers have become increasingly confident in their job stability.
• In the below chart it can be seen that since June 2014 the percentage of respondents saving for a future loss of employment has steadily declined. (This is a relatively new indicator, June 2014 is the earliest data available).
• In January 2016 the percentage of respondents saving for future loss of employment dropped further to 19.3%, the lowest seen since this indicator was initiated in June 2014.
• The drop in respondents saving for a potential loss of employment has been replaced by an increase in respondents saving for children's schooling and/or their own retirement.
16
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24
28
32
6/1/20
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7/1/20
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2015
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Percentage of Respondents Saving for Future Loss of Employment
Future loss of income/employment
Other
Housing purchase or downpayment
Household good purchase or downpayment
Saving to start your own business
Car purchase or downpayment
Own health expenses
Own retirement
Children's schooling
-12% -9% -6% -3% 0% 3% 6% 9%
Change Since June 2014 in Reasons For Saving
MNI China Consumer Sentiment Indicator
10
-7%
-5%
-4%
-2%
0%
2%
1/1/20
15
2/1/20
15
3/1/20
15
4/1/20
15
5/1/20
15
6/1/20
15
7/1/20
15
8/1/20
15
9/1/20
15
10/1/
2015
11/1/
2015
12/1/
2015
10
12.5
15
17.5
20
1/1/20
15
2/1/20
15
3/1/20
15
4/1/20
15
5/1/20
15
6/1/20
15
7/1/20
15
8/1/20
15
9/1/20
15
10/1/
2015
11/1/
2015
12/1/
2015
1/1/20
16
China Newly Built House Prices (YoY)
Percentage of Survey Respondents Quoting “Real Estate” As Best Place to Keep Savings
Consumers Becoming More Optimistic On Outlook For Real Estate • Providing another sign that China’s economy economic
transition is going smoothly new home prices have began to stabilize. In December China’s Newly Built House Price Index increased 1.6% YoY, a significant improvement from the 6.1% YoY decline seen in April 2015.
• As real estate prices have began to stabilize local savers are becoming more optimistic on the outlook for China’s real estate market. In the below chart it can be seen that from January 2015 through August 2015 the percentage of survey respondents quoting “real estate” as the best place to keep their savings dropped from 19% to just 10%. Since bottoming in August this indicator has increased significantly to 15%.
• Note the resurgence in optimism among locals regarding the outlook for real estate conflicts with concerns among global investors about the health of China’s economy following the surprise devaluation in August 2015.
• China’s property market makes up roughly 15% of China’s GDP. Sales of real estate are a key source of government revenues and many industries are strongly linked to real estate.
• Recall that worries over a potential hard landing in China began in early 2014 with concerns over plunging real estate prices. While investors around the globe were quick to panic in response to the first signs of weakness in China’s real estate market they have been slow to notice the recent stabilization of the real estate market.
Source: National Bureau of Statistics of China
MNI China Consumer Sentiment Indicator
11
Local Investors Remain Rational During Recent Turmoil
• In December Investor Rationality (which indicates the extent to which extreme emotions such as panic or exuberance are effecting investment decisions) dropped to levels close to the lower threshold indicating investors have become panicked.
• Deterioration in December stemmed from Beijing’s first ever red alert over pollution which increased concerns over China’s already struggling manufacturing sector.
• Despite the global chatter over the dire state of the Chinese economy local investors have remained rational.
-4
-3
-2
-1
0
1
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3
4
0
10
20
30
40
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/07
2/15/0
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015
8/1/20
15
11/1/
2015
Shanghai SE A Share Weighted Index PE Investor RationalityInvestors Overcome with Exuberance Investors Overcome with Panic
Investor RationalityRationality
MNI China Consumer Sentiment Indicator
12
Risk Appetite Rises In January Despite Turmoil
• Despite the concerns over the health of the Chinese economy risk appetite among local Chinese investors has steadily been increasing since at least June 2014. (This is a relatively new data set from the MNI China Consumer Sentiment Survey and was initiated in June 2014).
• In the below left chart it can be seen that respondents believing the best place to keep their savings in assets defined as safe havens (bank deposits, bonds and paying down debt) has steadily declined since June 2014 while respondents believing the best place to keep their savings in assets defined as risky (funds, local shares, foreign shares and wealth management products) has steadily increased since June 2014.
• Last month we noted our concern that the recent turmoil in China may derail the upward trend in risk appetite. Our concerns proved to be misplaced as ‘Risk Appetite” actually surged in January to the highest level seen since June 2014 when these indicators were initiated.
20
28
35
43
50
6/1/20
14
7/1/20
14
8/1/20
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9/1/20
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2014
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2014
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2014
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16
SafeRisky Ex. Real Estate
-22
-15
-8
-1
6
6/1/20
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2014
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2014
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2014
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2015
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16
Preference for Risky and Safe Investments Trend in Risk Appetite : (Risky ex. Real Estate - Safe)
MNI China Consumer Sentiment Indicator
13
Tracking Internet Activity in Asia Provides Unique Insight Into the Stability of Global Economy
• A play out of scenario 1 is dependent on a stabilization across fragile EMs. In line with this we are very focused on monitoring the stability of the weakest parts of the global economy.
• The RRG Asia ICAM (Internet Consumer Activity Monitor) Index can be used as a tool to provide an indication into the stability of the weakest parts of the global economy.
• The RRG Asia ICAM Index covers 4 Asian countries (Japan, China, India and Singapore) accounting for 80% of GDP in the east Asia and pacific region and 22% of global GDP.
• Severe pockets of weakness in the global economy will be reflected in the RRG Asia ICAM Index.
• We use the RRG Asia ICAM Index in conjunction with GCSI at Risk as a secondary check on the stability of the global economy.
RRG Internet Consumer Activity Monitors
-2
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2014
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2015
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16
RRG Asia ICAM IndexGCSI
RRG Asia ICAM Index and RRG Global Consumer Sentiment Index
14
RRG Asia ICAM Index Indicates Weakest Parts of Global Economy Are Stable
• Recall, levels below -1.2 in GCSI at Risk provide an indication that economic conditions across a significant portion of the global economy have become extremely unstable. Levels below -1.2 generally coincide with some type of crisis’.
• In the below chart the relationship between the RRG Asia ICAM Index and the GCSI at Risk is displayed. As the RRG Asia ICAM Index approaches a level of 0 GCSI at Risk approaches the threshold level of -1.2. As the RRG Asia ICAM Index drops to levels around -.5 GCSI at Risk approaches a level of -1.6 and is very likely to be at levels below -1.2.
• Since late 2006 levels below -.5 in the RRG Asia ICAM Index have coincided with periods of severe instability in the global economy.
• In the bellow chart it can be seen that both the RRG Asia ICAM Index and the GCSI at Risk are significantly above threshold levels indicative of severe instability in the global economy. This is at odds with the current consensus among global investors.
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-2.25
-1.5
-0.75
0
0.75
-1.8 -1.35 -0.9 -0.45 0 0.45 0.9 1.35 1.8
RRG Asia ICAM Index
GC
SI A
t Ris
k
Global economy at elevated risk of crisis
Currently we are here
RRG Internet Consumer Activity Monitors
15
Degree of Global Panic Remains Low As RRG Asia ICAM Remains At Elevated Levels
• Pockets of severe instability in the global economy coincide with a significant pick up in the percentage of countries in the RRG Global Consumer Sentiment Index displaying very depressed levels of consumer sentiment (below a standardized level of -1) indicating consumers are in a state of panic.
• In the below right chart it can be seen that as the RRG Asia ICAM Index approaches a level of 0 the percentage of countries in a state of panic begins to pick up substantially. As the RRG Asia ICAM Index approaches levels of -.5 the percentage of countries at panic spikes.
• Currently the RRG Asia ICAM Index is at an elevated level of 1.57 and in January (latest data available) the percentage of countries in the GCSI experiencing panic is low at just 3.5%. This points towards a stable global economy.
0%
25%
50%
75%
100%
-1.8 -1.35 -0.9 -0.45 0 0.45 0.9 1.35 1.8
RRG Asia ICAM Index
% o
f cou
ntrie
s at
Pan
ic
0%
25%
50%
75%
100%
-1.8
-1.35
-0.9
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0
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1.8
10/1/
2006
4/1/20
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2007
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10/1/
2008
4/1/20
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10/1/
2009
4/1/20
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2010
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10/1/
2011
4/1/20
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10/1/
2012
4/1/20
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10/1/
2013
4/1/20
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10/1/
2014
4/1/20
15
10/1/
2015
RRG Asia ICAM Index% of Countries at Panic
RRG Asia ICAM Index and % of Countries included in GCSI at Panic
RRG Asia ICAM Index and % of Countries included in GCSI at Panic
Currently we are here
Global Financial Crisis (4/2008 to 3/2009)
Eurozone Crisis (6/2011 to 10/2012)
6 Months Proceeding GFC
6 Months Proceeding Eurozone Crisis
RRG Internet Consumer Activity Monitors
16
RRG Asia ICAM Index Indicates Pessimism Among Global Investors is Unwarranted
• Elevated levels currently seen in the RRG Asia ICAM Index provides an indication that although conditions across many emerging markets may be far from stable, conditions are not bad enough to warrant the widespread concerns over a potential crisis.
• Current elevated levels above -.5 in the RRG Asia ICAM Index do not coincide with pockets of severe (crisis worthy levels of instability) in the global economy.
• In the below chart it can be seen that the RRG Asia ICAM Index dipped below the threshold level of -.5 prior to and remained below the threshold of -.5 during both the global financial crisis and the eurozone crisis.
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2006
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2010
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10/1/
2011
1/1/20
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4/1/20
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7/1/20
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10/1/
2012
1/1/20
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4/1/20
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10/1/
2013
1/1/20
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4/1/20
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7/1/20
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10/1/
2014
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4/1/20
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10/1/
2015
1/1/20
16
Shaded areas indicate periods when the RRG Asia ICAM Index
was below a level of -.5
Sentix Global Investor Sentiment
Source: Sentix
RRG Internet Consumer Activity Monitors
17
How Should Investors Position Portfolio’s In Current Environment?
• As Emerging Markets have struggled to adjust to China’s new economic model investors have become overwhelmed with the number of obstacles facing many EMs, as a result investors have lost focus of country specific themes and instead are simply applying massive discounts to equities in countries most exposed to a handful of eye catching key risk factors.
• On the following slide Emerging Markets are ranked based on their relative exposure to a set of key risk factors. In the below chart dividend yields (measured as the median dividend yield across stocks included in a country’s national stock index) are regressed on each country’s respective exposure to the key risk factors.
• We recommend overweighting equities in EMs most exposed to the set of key risk factors (Brazil, Russia, Chile and Malaysia).
• A play out of scenario 1 would be consistent with a stabilization in across EMs most exposed to the set of key risk factors, resulting in a massive re-rating in the equity markets of the most exposed EMs (Brazil, Russia, Chile and Malaysia).
• A play out of scenario 2 would be consistent with a large scale global crisis. In this scenario the least exposed EMs (which are not already priced for a crisis) have much more downside. In either scenario the strong relationship between valuations and exposure to key risk factors will break down.
RRG Internet Consumer Activity Monitors
0
1.25
2.5
3.75
5
0 5 10 15 20
Exposure To Key Risk Factors (Rank)
Med
ian
Div.
Yld
. Acr
oss
Stoc
ks
in N
atio
nal I
ndex
Exposure to Key Risk Factors Regressed on Dividend Yield
Scenario 1
Scenario 2
Brazil
Russia
Chile
Malaysia
Peru
Poland
South Africa
Turkey Greece
China Thailand
Mexico
IndonesiaSouth Korea
Philippines
India
18
RRG Internet Consumer Activity Monitors
Exposure to Russia/Ukraine
Exp. To Commodity Prices
Exposure to Oil Prices
Exp. To Strength in USD
Exposure to China
Political Turmoil Panic
Exposure to Key Risk Factors
Brazil 7 8 7 2 5 1 1 1
Russia 2 1 1 10 12 1 1 2
Chile 11 2 16 6 3 1 1 3
Malaysia 16 4 4 11 7 1 1 4
Peru 5 3 8 13 5 0 0 5
Poland 1 11 13 1 18 1 0 6
Colombia 10 5 2 8 13 0 0 7
South Africa 6 9 17 3 10 1 0 8
Turkey 4 13 9 5 16 1 0 9
Argentina 12 6 6 9 11 0 0 10
Greece 3 14 12 4 18 1 0 11
China 8 18 11 17 1 0 1 12
Mexico 18 10 3 7 17 0 0 13
Thailand 13 12 19 16 9 1 1 14
Indonesia 17 7 10 15 7 0 0 15
Philippines 15 16 15 14 4 0 1 16
South Korea 14 19 18 12 1 0 1 17
Egypt 19 14 5 19 15 1 0 18
India 9 17 14 18 14 0 0 19
Exposure to Key Risk Factors
Least Exposed
Most Exposed
19
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