Monthly Investment and Research Commentary – September 2015

Country Ranking

  • Magni Research slightly upgraded China for its intention to better abide by international standards in reporting data about the Chinese economy. Accurate economic data from China would increase confidence in reported GDP growth and related statistics. Businesses and investors would be better able to analyze opportunities and capital could be deployed more confidently. Additional upgrades are possible if Magni Research finds evidence that the intentions have been enacted and the data does become more creditable. Last month’s upgrade was not large enough to change China’s relative rank. China remains the country with the fourth lowest Magni Country Score in the developed and emerging markets.
  • The recent trend regarding year-over-year changes continued with the scores of South Korea, Japan, Spain and Philippines rising the most, while the scores of United States, Canada, United Kingdom, Colombia, Hong Kong, India, New Zealand, and Ireland having decreased.
  • Over time Magni Countries Scores generally increase, though countries do experience temporary setbacks. During the last year, Magni Country Scores on average did improve. Of the 46 countries in the developed and emerging markets, 21 improved their score, while 17 of the countries have unchanged scores.

Is China Moving Upward?

  • The Chinese economy is in the midst of a multi-year transition away from a reliance on credit-financed investment. Their goal is to move from an export led growth model to one that relies more on an expansion of the services sector and growth in personal consumption. China appears to have started making some progress in this regard with consumption apparently contributing slightly more GDP growth than investment.
  • Until China provides higher quality data about its economy, the precise status of the transition will remain uncertain. In addition to improving the quality of the data, additional structural reforms would help the Chinese economy become more open and market based. Successfully implementing such reforms would increase China’s Magni Country Score and improve its relative ranking.

Will EU Plans Lead to Improvements?

  • While the European Union has made progress in many areas, barriers to cross border capital flows remain. As a result, European businesses continue to be heavily reliant on banks for funding and not as reliant on capital markets; when compared to businesses elsewhere. The European Commission will soon publish a plan which aims to eliminate these obstacles and unlock investment in Europe’s companies and infrastructure. The plan will encourage greater use of capital market tools such as venture capital and securitizations.
  • If the planned changes make the listing of businesses on stock markets cheaper and streamline the bloc’s patchwork of insolvency rules, then the countries in the EU should have further increases in their Magni Country Scores. Since the topics are politically sensitive and progress is expected to be gradual, changes in scores are likely to occur over time.

Is Greece’s Path Forward Coming into View?

  • In the recent Greek elections, Syriza won 145 of the 300 sets in the Hellenic Parliament. Despite expectations of a close election Syriza defeated the right-leaning opposition party by more than seven percentage points. Syriza renewed its coalition agreement with the Independent Greeks party that won 10 seats, giving it a slender majority in Parliament.
  • Tsipras now has a popular mandate to implement the agreement with the EU. Among the immediate steps he must take will be to enact banking-sector reforms to unlock 3 billion euros ($3.4 billion) in bailout funds. The European Central Bank is also undergoing an asset quality review and stress test of Greek banks to determine their capital needs. The money is the last tranche of 26 billion euros released immediately after Greece won its third bailout in August. To access further bailout funds, Tsipras would have to successfully complete the first program review, currently slated to start in October and also renew talks with the International Monetary Fund.
  • The election results and the continued inclusion of the country in the European Union positions Greece to maintain the legal, regulatory, and economic infrastructure advantages provided by the EU, while avoiding a decrease in Magni Country Score associated with a “Grexit”. Successful implementation of the banking sector reforms would enable Greece to increase its Magni Country Score.