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Risky territory
Merrill Lynch’s much-anticipated global economics missive is out today.
The 21-page note, prepared, according to ML, by popular client request, is titled “Everything you’ve ever wanted to know about the world*” with the footnote “*And were not afraid to ask.”
The ML economists are arguing for a return to old-school style country risk analysis. They’re looking at 62 indicators for the 60 world economies they cover, plus regional aggregates (5,000 bits of data in all, the busy ML team tells us).
They’ve also constructed a risk ranking based on seven of those indicators: current account financing gap, FX reserves/short-term external debt ratio, exports to-GDP ratio, private credit-to-GDP ratio, private credit growth, loans-to deposits ratio and banks capital-to-assets ratio.
And the results are, err, the following:
In terms of regions, the most vulnerable are EMEA, Americas and Emerging EMEA, according to ML — all with over-leveraged financial systems and stretched external debt ratios. BRIC, Latin America and Emerging Asia are the safest, based on their ranking.
While placing Nigeria as the safest economy in the world seems extremely counter-intuitive, it’s worthwhile noting that many of ML’s riskiest countries/regions are those that experienced what the National Bureau of Economic Research called “capital flow bonanzas” in the past five years (Australia in 2007, the UK in 2005-2007, the US in 2002-2007, Romania in 2004, etc.) — leading to a higher risk of financial crises in those areas. It also, at least, tallies with ML’s global economic theme in recent months — impaired Anglo-Saxon consumers.
Related links:
Capital Flow Bonanzas: An Encompassing View of the Past and Present - NBER
An impaired Anglo-Saxon - FT Alphaville
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Aussie assessment may be scarily true even though the so called indicators are questionable. Has that very calm before storm feel down here.
I totally agree with the Australian assessment, even though it may look ridiculous. Australia is not a safest investment place anymore. With the only remaining property bubble country, which is far more inflated than the US or UK ones, coming recession (in fact, NSW has been in recession for over a year or so) and unemployment, bursting the bubble will ultimately lead to collapsing the AU banking system. It is something very difficult for Australians to accept, indeed.
Without having read the whole paper (Tracy could you post the doc?), it’s difficult to argue in favor of ML. However, maybe, and I say maybe, they mean more or less risky in a relative perspective: prone to a rerating from the market’s current perception about the specific country risk. Anything else just does not seem to make sense.
An alternative view on the topic from Oxfan and Aon:
http://www.scdigest.com/assets/Reps/2008_PE_Risk_Map.pdf
LRs can also check here: http://v2.ftalphaville.ft.com/longroom/tables/equity-strategy/2008-political-and-economic-risk-map-by-aon-and-oxford-analytica/
(btw: comments from the new version of AV do not appear on the old one)
I think the anxiety about investment bank job losses is distracting ML team. If the research has come back with some really spurious results, it should have been ditched or kept for internal use only rather than produced for the external consumption and becoming an embarrassment.
What a nutty analysis. If I pick the right combination out of the 62 indicators, I could come up with any ranking you like. What is their conclusion? Invest all your money in Nigeria and Colombia instead of UK, USA, Old Europe? Hilarious as well as scary. Why are investors fleeing these ‘low-risk’ countries? Are these investors stupid? No, they’re looking for LIQUIDITY. ML seems to have problems with the word.
Nigeria is clearly the least risky country in the world. Many Nigerians e-mail me that they have $7.2 million that they wish to share with me on a 50/50 basis. They must be rolling in money!
I think I might apple to ML - if that is what passes for acceptable then I would be able to take my subnormal IQ there and be a genius.
I could do little work and when asked for a predicion, forecast or anything I would only have to talk in buzzwords and make a few guesses. Wow.
Where do I sign up.
What a joke ML is. Is anyone still surprised that they went bust. What a good salesjob the people did with BOA.
This is ridiculous. Ukraine, Latvia, Estonia, Letonia on the brink of default and these guys bet on Australia… amazing!!!
They even get paid for this…
3m LagosIBOR…….?
Yeah, the rest of the indicators are laid out in the note. This was there proviso:
While we believe that our country risk ranking produces plausible results
(Table 4, p.3), one need to be aware that, as any ranking of that type, it is
highly sensitive to the selection of indicators employed. For example,
developed countries can probably sustain higher external vulnerability
indicators than emerging markets; some Euro area country statistics are
possibly misleading given there is a monetary union. For that reason in the
remaining part of this report (pages 4-18) we present 62 indicators for each
of the 60 world economies that we cover, as well as global and regional
aggregates for all these indicators – overall nearly 5000 data points to digest.
They look at 62 risk indicators, but then publish a ranking based on only seven of those?