Broad economic weakness across global economies is producing many shorting opportunities, especially in emerging markets, writes Landon Whaley.
While everyone’s navel-gazing the Federal Reserve’s rate cut, Chair Jay Powell’s Bizarro World presser and the price level of the S&P 500, let’s grab our passport and take a trip around the world to get a broader Fundamental Gravity-based perspective.
One of the best measures of economic growth is a country’s manufacturing Purchasing Managers Index (PMI). A PMI is a survey-based indicator performed by various firms around the world, most notably Markit. Despite being poo-poo-ed by the Old Institution as “soft” data, few data sets can rival the manufacturing PMI’s track record in accurately predicting the trajectory of economic growth.
Of the 17 largest economies with a manufacturing PMI, only two have current readings that are in expansion territory (north of 50.0) — India and the United States. However, before you grab that data point with both hands and leverage your accounts with S&P 500 futures, these two economies aren’t likely to hold out long.
India’s manufacturing PMI (52.5) peaked in February and has now slowed in three of the last five months. The Markit U.S. Manufacturing PMI is sitting at 50.4, which is the width of a sheet of paper away from being in outright contraction. The remaining 15 economies are all in contraction by varying depths of despair. France and Brazil just entered contraction, while Taiwan and Germany are bringing up the rear with PMI readings in the 40s.
In PMI speak, a reading below 47.0 is considered recessionary. There are currently three economies below that threshold, including the Eurozone as a whole, and the aforementioned Taiwan and Germany. The other 14 PMIs are in pervasive downtrends indicating a global recession could be just a few months away.
I’m not a perma-bear who scoured the Earth looking for the one data set sure to scare you straight. Our robust Fundamental Gravity framework, which tracks thousands of growth and inflation-related data points across more than 30 economies is confirming the growth slowing signal being sent by global PMIs.
Based on all the available data through Friday, the Fundamental Gravity environment occurring most often across the economies we track is once again in Winter. In fact, 17 economies are currently experiencing Winter, which is approximately the same number of economies (20) in Winter during the Q4 2018 carnage.
While smaller economies like Belgium, Austria, and Columbia are included in this Winter headcount, there are also some big boys feeling the chill that you may have heard of: United States, Eurozone, Germany, Singapore, South Korea, and South Africa, to name a few.
The business media and Old Institution have blinders on and can only focus on the Fed, Trump’s tweets and the trade war. But it’s a big world out there, and there are endless opportunities for those of us willing to dig through the data and use a process-driven approach to evaluate market opportunities.
As you’ll read about in the “Winter is Here” macro theme update on Monday, we’re getting paid on our Focus Market calls to be short equities in both South Korea and South Africa.
As we traverse the remaining two months of Q3, the list of emerging market shorts is likely to grow. We’ve got Wintry conditions in many emerging market economies, and the U.S. dollar is attempting to bust a move to two-year highs. That combo platter is an emerging market short sellers dream.
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