Indicators for Country-Specific Unit Trusts
From Financial Literacy Wiki
Let's look at the indicators for Country-Specific Unit Trusts (CSUT) investors can use. These indicators are often mentioned in the newspapers. Some of these indicators are only seen in US. Would-be investors should note that in assessing CSUT, especially those that invest in Asian countries, US is major market for Asian countries' export, thus they should watch for the health of US economy.
Retail Sales
The indicator is the sales of durable and non-durable goods. For most countries, it is indicated as percentage change year-on-year (y-o-y) and/or month-on-month (m-o-m). It can be use as a gauge for consumer spending. It is usually reported in nominal terms, thus investors have to see if there are anomalies in price level before using it as an index.
Investors should, if possible, look at a detailed report of retail sales. If there is a major component that is responsible for the increase or decrease of retail sales, then it is not a good gauge of consumer spending. It is a good gauge of consumer spending only if it is broadly based. Investors should note the trend of retail sales. It is best to look at a three months or longer trend so that it would eliminate any volatility due to seasonal change or other factors. A rising trend would indicate that the economy is in good health, which in turn translates to higher profits for companies.
Personal Income Growth
This index is usually seen for the US. The components that are under considerations are wages and salaries, other labor income, proprietors' income, rental income, dividend income, personal interest income and transfer payments.
This gives investors an idea on how much income consumers have for spending and savings. So an increase in personal income would translate into consumers having higher disposable income to spend whereas a decrease in personal income will point to weakness in the economy. Investors when looking at this index as usual should note that if there is any event that may result in a sharp change in the growth rate, for example, larger farm subsidies due to seasonal factors or natural disasters.
Consumer and Business Sentiment
The data is available for most countries. US is the only country that actually has two organisations that measure consumer confidence. One organisation is the Survey Research Center at the University of Michigan (UM) and the other is Conference Board (CB). Although they are measuring the same phenomena, there are many differences in their approach and calculation. For example, they both have different sample size (UM is 500 consumers while CB is 5000 households), the data collection method is different (UM makes phone calls while CB send out questionnaire) and they place different weights on each components.
Consumers will typically feel more confident in an expansion then during a recession. The high confidence would translate to high spending by consumers especially on durable goods. Investors should look at the trend of consumer index together with the trend in retail sales. This would confirm whether the economy is picking up or going down.
Business confidence index, like consumer confidence index, means the confidence of business owners in the economy. Higher confidence index would translate to higher business spending. For Japan, the name for such survey is called tankan. It is a quarterly survey that reflects Japanese business owners' confidence in the economy. It fluctuates about zero, a negative (positive) value would signal that there are more (less) pessimistic owners than optimistic owners.
Durable Good Orders and Sales
Durable goods are termed as products that have a life span of at least three years from the manufactured date. This can include consumer durable goods or capital equipment. Durable goods orders are a good index of future production and consumer & business confidence. This is because most of these durable goods are not bought in cash but by utilizing bank loans or paid in installments. This reflects consumer and business confidence in their future cashflow.
Business Sales and Inventory
Business sales means the amount of goods sold and inventory mean the amount of manufactured products that are stored.
Higher sales translate to higher earnings during an economic expansion and vice versa. As for inventory level, it can be quite tricky for beginners. A high level of inventory is acceptable as long as the inventory turnover is high. That means inventory stay in storage for a short period of time. During a recession, inventory level can be high but turnover rate can be low. When inventory level is low, it signals future production which can mean economic expansion like the case for US where inventory production brought about a high growth rate for Q4 of 2001 and Q2 of 2002. But this is only a short-term index of the economy.
Housing Starts and Permits
Again this is usually seen for US. Housing starts as the name depicts is the number of houses that started construction for that particular month. Technically speaking, it is an excavation beginning for the footing or foundation of a residential building or a dwelling that is being totally rebuilt on an existing foundation. Permits are then seen as a leading index of housing starts.
Investors to gauge the recovery of the economy can use these two indexes. The higher the number of housing starts or granted permits would mean higher economic growth. This reflects the health of the economy.
Consumer Spending
We know that consumer spending forms a large part of GDP. For example, consumer spending forms 70% of US GDP and 55% of Japan's GDP. With the recent recession, most country especially Asian countries realized that they cannot depend on exports as a growth engine, and has now turn their focus on domestic demand. Countries like South Korea and China who stress on consumption growth have so far weathered the recession. Elsewhere in South East Asia, Indonesia and Philippines, to name a few, has seen increase in consumer spending, underscoring their economic growth during the aftermath of the Asian Financial Crisis.Higher consumer spending would translate to higher corporate profits, which is good news for equities investors. Thus the change in consumer spending is a good index for the economy.
Business Spending
Like consumer spending, it serves as a good index for the economy. Higher business spending would translate to higher capital investment that in turn would generate higher income per capita as explained by economics theory. Business spending could also serve as a gauge of business owners' confidence in the economy. Companies would reduce spending if they are not sure about their future sales so as to avoid over capacity that can be very costly.
Exports and Retained Imports
Investors can look at these figures as a gauge to the 'overseas' demand for goods. Most of the figures reported are actually y-o-y and m-o-m growth rates of exports. A higher growth rate of exports means that there is an increase in sales by companies, which can translate into profits.
But investors should note that if there is any major component that has resulted in a large increase in export growth. The export growth figure can also be distorted by, for example, export of oil rig or cruise liner. A broad base increase in exports is more preferred. So investors may, to eliminate this one-time distortion by looking at a three-month or more average trend. A rising trend would be one 'good health' index of the reported country. For retained imports, it is an index for future exports. These are usually goods that serve as materials for industries in the country. So a higher figure for retained imports may translate into future exports.
For Singapore, the figure to look out for is Non-Oil Domestic Exports (NODX). Looking at this figure would reflect the health of the Singapore economy better because electronics form a large part of Singapore manufacturing base and it accounts for two thirds of the NODX figure. Other figures included in NODX are chemical and pharmaceutical exports.
Oil Prices
Oil is a main source of energy for developed and developing countries. It forms part of the bottom-line for many companies, a substantial part for transport companies. Thus a persistent rise in oil prices can lead to inflation rate growth. This in turn would discourage consumer spending. This can reduce corporate profits and may derail the economy if inflation is left unchecked.
Consumer Price Index (CPI)
A persistent large increase in CPI is not preferred. This is because it would discourage consumer spending as the 'store of value' function of money is eroded. Moreover most central banks may perceive this as a threat to economy growth. To counter this trend, central banks may increase their interest rates. This has an adverse effect on equities prices and durable goods due to the higher borrowing cost that may reduce corporate profits and reduce sales in durable goods.
But a small increase in CPI is seen as a good sign for companies as it signals the pricing power of some companies, as opposed to deflation which has impede the economy of Japan and Hong Kong before. Both the economies were in recession because, persistent deflation has made consumer unwilling to spend their money, resulting in less profit for companies. The reason why people are unwilling to spend because the longer they wait, the greater is the purchasing power of their money.
Productivity and Wage Costs
Productivity is defined as output per man-hour and wages cost is reported as unit labour costs (dividing compensation per hour by output per hour). Increase in productivity is seen as a favorable sign on corporate profits as companies are able to produce at lower unit labour costs, reducing substantially the total cost to companies as wage costs forms a large part of business costs. Productivity and wage cost has to be seen together with CPI or inflation. This is to determine long-term implication of inflation on the economy. Economy with low unit labour costs or high productivity, and low inflation is perceived as healthy.
Unemployment Rate
During an expansion in an economy, unemployment tends to be low. A lower unemployment rate also signals that a larger proportion of the working population has spending power that is good for corporate sales. But a low unemployment rate may signal inflationary pressures and moreover unemployment rate is seen as a lagging index of the economy, thus investors do not have to put too much emphasis on unemployment rate.
Leading, Coincident and Lagging Composite Indexes
These are indexes that, when looked together, determines which part of the business cycle the economy is in. A rising leading index would indicate that the economy may be expanding in the future, a coincident index indicates the current health of the economy and the lagging index shows the past health of the economy.
Below is a list showing the composition of the leading index.
- Average weekly hours of manufacturing production workers
- Average weekly initial claims for unemployment insurance, state program
- Manufacturers new orders for consumer goods and material industries in constant dollar
- Vendor performance (percentage of companies receiving slower deliveries)
- Interest rate spread
- Contracts and orders for plant and equipment in constant dollars
- New private housing building permits
- Prices of 500 common stocks from S&P
- Money Supply (M2) in constant dollars
- Consumer confidence index compiled by University of Michigan
Investors can look at the indexes to determine which part of the business cycle the economy is in and decide whether to invest in that country.
Purchasing Manager Index (PMI)
This index is usually seen in the newspapers for Singapore and the US. This is actually measuring the health of the manufacturing industries. As mentioned before the manufacturing sector forms a large part of the economy for many countries. Thus this index would be reflective of the economy.
For US, the index is compiled by Institute of Supply Management (formerly known as National Association of Purchasing Manager) The components for calculation are new orders, production, supplier deliveries or vendor performance, inventories and employment1.
For Singapore, the Singapore Institute of Purchasing and Material Management compile the index. The components are similar to that of the US but also includes retained imports, finished goods and prices.
A figure of above 50 signifies that the manufacturing sector is expanding and vice versa. A detailed look at the index would provide more information for investors. This is because components used for calculation contain leading, coincident and lagging indicators. Investors should look at the trend of PMI to determine the health of the economy.
Industrial Production Growth
For most countries, especially Asian countries, that has manufacturing forming a large part of economic activity in their countries, investors can look at the industrial production growth. A high growth means that there is increasing demand for the countries' output. This can translates to profits for these companies. A sustainable high growth trend may also translate to future business spending, as companies have to expand and maintain their factories to meet with the increasing demand.
Again like other indicators, investors should note the trend and the explanation of any large change in industrial production growth. A rising trend would be a good sign to invest in that country, accompanied by other favourable signs from other indicators
Initial Unemployment Claims
This indicator can only be seen for US. In US, there are more than 50 states that has unemployment insurance, meaning that the jobless can make claims on jobless benefit, if they are unemployed. This is reported weekly with a one week-lag and it is seen as a leading indicator of unemployment rate. But like most indicators, investors should take, the average of four weeks, and see the trend. A rising trend is good as it means that most people are employed, translating into higher disposable income for consumers and also, companies are confident of sales thus hiring more. This translates to better corporate profit. As the data is frequent, it can give a more immediate impression on investors the health of US economy.
