What can investors do when official economic data is overly smooth, light on detail, opaque in methodology and sometimes filled with gaps?
That is the conundrum the world’s largest fund managers face when it comes to putting money to play in China. Do they spend it to assemble a research team on the ground to compensate for the sketchiness of official data, or choose the passive route and hug the weightings in indexes such as the MSCI Emerging Markets Index?
Some managers have shown there is another way to stand out – they are relying on proxy data and so-called nowcasting to build a China investment thesis. Nowcasting uses the latest available and projected data to forecast macro numbers long before official data is released.
Vanguard, HSBC Global Asset Management and Unigestion are among firms that have already set up nowcasting teams with a focus on China. Each now has ways to squeeze real-time insights from scant, irregular and incomplete official data, and make sense of the country’s distinct and evolving economic model.
The fund managers are using large numbers of datasets: domestic electricity production; railway freight; consumption of medicines; an employment component of China’s manufacturing Purchasing Managers’ Index; and even economic signals from Australia and New Zealand that count China as their largest trading partners.
Nowcasting could prove especially useful as investor money floods into China at the same time as the world’s second largest economy also slows
Fund managers that choose such a path get a double payoff. They have access to signals well ahead of their peers that can guide them to hike or cut exposure to China – a valuable tool amid the glut of investment flows. They can also use the experience gained from this exercise elsewhere in Asia where emerging economies such as India, Indonesia and Vietnam suffer from the same lack of credible economic data.
Nowcasting could prove especially useful as investor money floods into China at the same time as the world’s second largest economy also slows.
Last month, MSCI announced it is increasing the weighting of 235 of China’s large-cap ‘A-shares’ in its indexes. That is seen as boosting equity flows by more than $100 billion in 2019, and by $200 billion each year on average over the next 10 years. The inclusion of Chinese bonds in the Bloomberg Barclays Global Aggregate Index from April could mean another $150 billion of inflows by the end of 2020.
How well has nowcasting worked? At the start of the year Unigestion turned contrarian as it went long global equities – despite economic signals including China’s consumer spending slowing for the first time in many years, raising questions over the nation’s growth outlook and in turn the global expansion.
The asset manager’s nowcasting indicators were telling it fears of a market slide were overblown, and those indicators proved right. The MSCI China A-share index is up about a quarter year-to-date and the MSCI Global Index is up more than 10%.
Getting China forecasts right matters to anyone invested in emerging markets as an asset class or in economies with close ties to China. Experiences such as these suggest nowcasting can help.