Another wave of business confidence data (ISM, PMIs, etc.) has reached the markets of late. As always, there were beats and misses. But over the last couple of months these have been more regionally centered. In recent months business confidence indicators disappointed and went down in emerging Asia, and surprised and went up in Europe and the US.
Asia ranks bottom
Taking the latest data from the Markit Economics PMI surveys reveals that the average PMI of the six emerging Asian countries in their universe now stands at 49.1, comfortably below the psychologically important threshold of 50. This compares to an average PMI of 50.3 in the debt-stricken eurozone. This number was below 47 only last April. Still 50.3 is by no means an exceptional level but it is somewhat remarkable given the fact that the eurozone economy will shrink this year while the IMF estimates that the developing Asia region will grow about 7%.
But lagging the eurozone is only the beginning. If we focus on core European countries that are not in the euro, the difference in business climate becomes even bigger. The average PMI of Denmark, Norway, Sweden, Switzerland and the UK reached a pretty impressive 54.3 in July, some five points higher that the emerging Asia average. And then there is the US, with the ISM-index hitting 55.4 last Thursday, a fresh high in the last two years.
Link with equity markets
The interesting part of the business confidence indicators is that they are forward looking. So even if your growth is expected to be negative, like in the eurozone, your PMI can top that of a region that is growing 7% per year. Therefore, one conclusion from this latest round of business confidence data must be that emerging Asia is decelerating while Europe is accelerating.
This forward looking aspect of business confidence indicators is not only useful in a macroeconomic environment, however. There is also a pretty decent fit with equity returns. In the graphs above I have plotted the relationship between the 12 month rolling equity return of the S&P 500 index (SPY) and the ISM index and between the China PMI index and the 12 month rolling equity return of the Shanghai Stock Exchange Composite (GXC). By no means perfect, but there is a pretty strong correlation between the two.
In the graph below I have plotted the relative performance of the MSCI Emerging Asia Index (GMC) vs. that of the S&P 500 index since the start of this year. It's clear that Emerging Asian stocks have not been able to keep up with US equities. A quick analysis learns that the average PMI of the Emerging Asia countries for January was 51.4. Since then the business confidence in Asia has gradually eroded accompanied with an underperformance compared to the US, where business activity picked up.
Bottom line; business confidence indicators like PMIs provide not only good estimates of future economic growth developments, they also reflect, to some extension, differences in stock market returns, a characteristic that is not shared by many other macro-economic data series.