Connecting the economy to markets
by Hansi Mehrotra
15th May 2014
Official economic indicators tend not to be completely reliable or timely. Macro analytics firm ZyFin addresses this ‘data darkness’ with economic indicators that lead official releases by months, offering wealth managers a valuable input for their asset allocation strategies.
The macro economy has a strong influence on the direction of financial markets. Reliable macro indicators would, therefore, offer invaluable insights to wealth managers, fund houses, brokers and the like, giving them the opportunity to anticipate crucial turns in the market.
However, the macroeconomic arena, as a field of research, remains largely untapped, primarily because of the steep challenges involved in distilling signals from the granular macro-economic data, which are often difficult to access. ZyFin overcomes this hurdle with its economic indicators and investment strategies.
ZyFin’s forward-looking indices and macro indicators cover an entire gamut of economic parameters, ranging from consumer sentiment (which drives 60% of the Indian economy) to the business cycle, inflation, foreign exchange rate and overall GDP. This can give any financial market participant, who currently has to rely on official figures, an edge in devising investment strategies.
ZyFin Research was set up in 2013 by Neeraj Bhargava, who bought the intellectual capital from Boston Analytics, where eminent economist Dr Sam Thomas had developed a consumer sentiment indicator, along with some of the other economic indicators. It was aimed at foreign investors who wanted to invest in India but were not confident about the official economic indicators.
Capturing economic trends early
ZyFin’s exhaustively back-tested products have proven their foresight. A study of their performance would make evident their ability to predict their benchmarks, enabling those with access to the information to hold a forward-looking view of the markets. ZyFin is a singular force in this game-changing domain. Here is a closer look at some of the products:
- Consumer Outlook Index – a monthly consumer sentiment index based on 4000+ face-to-face interviews conducted by TNS across 18 key Indian cities. It has a number of sub-components, including consumer outlook, employment, spending, inflation, real estate, vehicle purchase, durables, basic necessities and borrowing comfort. Apart from providing key insights into broad economic factors such as employment and inflation, the underlying data, measuring sentiment of a representative set of urban consumers, provides advance indications for trends within automobiles sales, home purchase and other key spending categories. Such advance indications are a useful data source for tracking and recommending corresponding sectors, as is done in developed economies such as the US and UK.
- Business Cycle Indicator – an independent leading indicator of the business cycle in India, based on multiple monthly economic indicators. It indicates the state of the Indian business cycle more than two months prior to the release of IIP data, allowing reliable and advanced detection of turns in the business cycle. A three-month uptrend in the indicator signifies an improving business cycle and vice versa.
- Monthly Forecasts – ZyFin has developed a set of robust time series models to forecast monthly trends within key economic variables, such as the foreign exchange rate, inflation rate and gold prices. These have a lead predictability of up to three months and have been adequately back tested through in-sample and out-sample procedures to establish their adequacy.
As an example of a monthly forecast, the Zyfin Forex Forecast is a monthly tool to predict future INR-USD rate. It leads the RBI Reference Rate Series by 3 months. ZyFin Research’s Forex Forecast has been consistent in its ability to accurately predict rupee volatility three months in advance. With a three-month lead correlation of approximately 0.89, the data appears very useful. For example, as early as February 2014, when the INR USD rate was 62.3, ZyFin had predicted that the INR-USD rate would drop below 59 in May 2014.
Practical investment strategies
Based on the economic research, ZyFin has also developed investment strategies that can be used by asset and wealth managers for practical portfolio management. These strategies leverage upon the advance economic signals detected through the various proprietary economic indicators developed by ZyFin. “We get to understand economic risks before time,” says Debopam Chaudhuri, also a founder member. Chaudhuri is an economist and risk management professional with previous work experience at MSCI.
The Macro Alert (Equity Allocation Score), for example, is a monthly indicator that alerts equity investors about upcoming risk in equity investments through an easy-to-understand colour-coded scoring mechanism. Test portfolios have yielded returns in excess of benchmark returns with a significantly reduced risk level.
The ZyFin data can also be used as leading indicators for certain sector stock indices such as auto, bank and capital goods. “Clients can subscribe to our proprietary forward-looking data or collaborate with us to create sophisticated investment strategies,” says Chaudhuri.
With robust methodologies and a significantly large survey base, ZyFin is now on the RBI’s data sources panel. ZyFin data and research are available on Bloomberg, Reuters and Factset too.
Zyfin has devised a comprehensive platform where subscribers can access the data and research through online mobile apps, pdf reports and spreadsheets.