Most investors pay close attention to central banks’ decisions or economic growth figures. But being successful in investing requires anticipating what central banks, economies and markets will do before it actually happens. How can you do that? There are many not-so-obvious indicators you can watch, and GAM’s investment professionals shared a sampling of their favourites.
Larry Hatheway, Group Head of Multi-Asset Portfolio Solutions and Group Economist
Owners’ equivalent rent is a component of consumer price index (CPI) in the US and measures what it would cost a homeowner if they were to rent their home. This component alone makes up more than 24% of the total index and more than 30% of the core index that excludes food and energy prices – the US Federal Reserve’s preferred measure. So it is central to understanding policy dynamics in the US and represents, together with wages and healthcare costs, a key upside indicator for inflation.
Oliver Maslowski, Portfolio Manager, European equities
World trade growth is worth watching, especially in comparison to world economic growth. World trade growth below the GDP growth would be a warning signal and can indicate protectionism, lack of liberalisation, diminishing growth dynamics of emerging markets and a continuous growth crisis in Europe. World trade growth is also a good indicator for the development of German exports.
Gianmarco Mondani, Investment Director, non-directional equity team
The Commodity Research Bureau Raw Materials Index (CRB Rind) is a measure of price movements of 22 basic commodities, whose markets are usually among the first to be influenced by changes in economic conditions. As such, it serves as an early indicator of impending changes in business activity. If companies are not buying raw materials such as rubber, tallow or cocoa, that is a clear sign of a slowing economy. The precipitous fall we’ve seen in the index recently does not bode well for the future growth of global economy.
Jeremy Smouha, Atlanticomnium, which manages several GAM credit strategies
Many investors follow employment figures to see how the economy is doing, but overall figures can sometimes be misleading. We like looking at the difference between changes in the self-employed and the people employed by companies. When the number of employees rises faster than the number of self-employed, we believe that it is a better guide to a strengthening economy.
John Lambert, Investment Director, global and UK equity strategies
Silver is an industrial metal, while gold is typically seen as a hedge against a broad range of adverse outcomes and a safe haven. Gold usually peaks in times of credit stress and deteriorating economic performance, while silver typically outperforms when the economy is experiencing reflation and improving conditions. The ratio of the two has historically provided very insightful clues about inflection points in the prevailing cycle, reflecting – it is said – the likely changes in monetary policy six months ahead. At the moment, the trend of the last five years or so is still intact, with gold having the upper hand. Should this change, and possibly even be confirmed by other similar indicators, then investors would do well to pay heed in our view.
Michael Lai, Investment Director, Asian equity strategies
Total margin financing, or the money borrowed to buy securities, is one signal we track closely as this reflects the level of speculative activity in the market place. It peaked in June at RMB 2.2 trillion, which is equivalent to 10% of the free float of China’s equity market. This is high compared to normal developed markets like the US with margin activity at less than 2% of free float. We think anything above RMB 1.5 trillion, or 7% of free float, would bring us back to uncomfortable, frothy levels again.
Tim Haywood, Investment Director and Head of fixed income strategies
Current production of oil and grains is far outstripping current consumption. Storage for many commodities is unusually heavily utilised: bins, barrels, barges and barns. The number of tankers lying off Galveston, Chinese and ASEAN ports, in transit and awaiting to start their journeys from the Gulf, is far higher than usual. Future prices are higher than spot, encouraging such storage. The northern hemisphere bumper harvest is being stored rather than processed according to US, UK and European sources. Combined, these high levels of inventories of consumables should help prevent a spike in headline inflation due to food and energy shortages or price spikes. No inflation should help deter rate hikes and help consumers make real savings.