October 6, 2016–This post is intended to explore two separate but connected issues:

  • Is a Commodity Research Board Index a good proxy for World economic growth?
  • What are the implications for Emerging Markets?

Commodity Research Board Raw Industrials Index

First, it’s a bit strange to be writing about commodities and their importance on the same day that West Texas Intermediate surpassed a psychological threshold of $50 for the first time in more than three months, and not be writing about oil. I’m writing about other commodities. The CRB has several indexes that track different categories of commodities including metals, textiles & fibers, livestock, as well as fats & oils. Their raw industrials (RI) index brings together the metals index, textiles & fibers, and just one item (hides) out of livestock. It does not include the food categories. Importantly, the index does not include crude oil so is not subjected to the vagaries of that market which is influenced heavily by significant speculation, financial engineering, and a “wannabe” cartel.

The CRB collects prices for each of the components from various markets, all in the U.S. so all are priced in dollars. The details can be found on their website. The items in the index are produced in a wide number of countries and are used worldwide, so truly represent a world market.

A first question is whether the CRB RI might be a good proxy for global economic growth. The chart below shows the year-over-year change in the index compared to real global gdp growth as amalgamated by the IMF. The notable features of the chart include a loose tracking of the two items and several points when the CRB RI led world GDP growth in a change of direction. Also of note is the recent uptick in the CRB RI. In level terms the CRB RI bottomed out in November of 2015 and has been moving up fairly steadily since. It is a daily index and through October 5, 2016 was up 7.1% y/y.

Figure 1.png

Source: Bloomberg

By contrast, the global GDP figure is only available through 2015Q4, when it measured just 2.8%. The biggest challenges with GDP data are of course that they’re atrociously challenging to calculate, and that they are significantly delayed. If you were to accept that the CRB RI index is a helpful proxy for global growth, then it would be encouraging that it has improved sharply since the end of 2015 through today.

What does it mean for Emerging Markets?

If the CRB RI is signaling good things for the world economy, then there is an argument for being relatively more optimistic for emerging markets (EM). EM countries generally have a higher beta to growth both in economic and financial market terms. The market is often focused on crude oil and the implications for EM energy exporters, but many emerging markets also export significant amounts of materials such as those in the CRB RI.

The chart below shows the CRB RI indexed to November 24, 2015 when it reached its low for this cycle. Note that this bottoming out came 2 months before the bottoming out of crude oil, and that the CRB RI rose fairly steadily through the market turmoil of January and February 2016. The MSCI Emerging Markets equity index is also shown, and is indexed to its low, registered on January 21, 2016. Since bottoming out it has rallied about 33%. As of October 5, the CRB RI is up about 16% from its low.

figure 2.png

Source: Bloomberg; WTIA

The MSCI EM index is in dollar terms and is of course the combination of many individual markets. The table below shows regression analysis of individual equity markets included in the MSCI EM index in their local currencies. The regression analysis is of y/y% changes in the country’s equity index regressed on the y/y% change in the CRB RI. The adjusted r-square column shows that each of the equations has a very good fit, and the coefficient column shows how sensitive the equity market is to the CRB RI. For example, China’s coefficient of 0.76 indicates that when the CRB RI moves up 1% y/y, China’s equity market moves up 0.76% on average. The t-stat column merely shows that for the most part, the estimates are statistically significant.

figure 3.jpg

Source: Bloomberg; WTIA

Core Narrative
The CRB RI might be a good proxy for world economic growth, and if so, it is quite handy because it is available on a daily basis and comes from reliable market sources. It bottomed out way back in November of 2015, and managed to keep moving up through the market turmoil of January and February 2016, including the rout in crude oil prices. As it has continued to move up this year, equity markets in EM countries as well as much of their economic data (trade, inflation, currencies, etc.) have improved too. This has been supportive of our recent move to close the underweight in emerging markets.


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