Economics – GDP Growth

For the first portion of my analysis, I am interested in determining the correlation between growth in emerging ecnomies vis a vis developing countries.

Figure 1.1.1: % Increase / (Decrease) in Size of Cohort vs. Population Size: Emerging Market Cohort

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From the onset, I understood that it would not be appropriate to compare countries on a group by group basis. The reasoning for this is because my primary focus of analysis involves emerging nations. This creates a problem because countries are commonly added or subtracted from this cohot for varying reasons (no reported data, countries were too small, countries became too big), so it was necessary to cleanse the data I had on hand. For this experiment, I divided countries by subgroup; dividing them in to 4 cohorts. There is overlap amongst each cohort, but it will be appropriate for analysis later on.

I defined countries as 1) emerging 2) developed 3) g7 4) eu. I wanted to isolate the periods of time by which countries were added or subtracted from each cohort from the time period November 1970 until the present day (or more precisely defined as CQ2 2014). I accessed the information by downloading world GDP by country on a quarterterly basis on Factset.

As we can see in figure 1.1, from the period in the middle of the 1990’s to today, many countries were added to this cohort. I quickly chose to isolate my focus of analysis from mid 2000 onward.

Figure 1.1.2: Mean and Median GDP of Emerging Market Countries

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At this point in time, it is very obvious that country additions/ subtractions had a tremendous impact on our specified points of analysis. There is a sharp drop in median/average GDP for the emerging markets cohort right before CY 2013.

I dug further, to observe the absolute variance between the countries with the highest GDP and the countries with the lowest GDP:

Figure 1.1.3: Variance in GDP in Emerging Market Nations, Min to Max

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The disparity was only further exacerbated when we analyzed the cohort on an absolute, rather than normalized basis (observing the avg/median).

Observing the rate of change of average and median GDP on a more isolated basis, it becomes clear that this cohort is unsuitable for our analysis. Recall that our primary objective here is to understand the relationship between growth in developed nations vs. growth in emerging market nations.

Figure 1.1.4: Rate of Change of Average/Median GDP in Emerging Market Nations

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Upon further analysis, I realized that the skew in my data derived from the removal of China and Venezuela from the categorization of Emergin Market Countries. I set out to “cleanse” my data and omitted the two from my next point of analysis.

Figure 1.1.5: Treatment of Emerging Markets Cohort; Removal of China and Venezuela

Figure 1.1.5a: % Increase / (Decrease) in Size of Cohort vs. Population Size: Emerging Market Cohort

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Figure 1.1.5b: Mean and Median GDP of Emerging Market Countries

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Figure 1.1.5c Variance in GDP in Emerging Market Nations, Min to Max

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Figure 1.1.5d: Rate of Change of Average/Median GDP in Emerging Market Nations

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Following the removal of China and Venezuela, we achieved a much more suitable cohort of analysis. We cleaned our data by holding constant a few variables, the primary variable being additions/substractions of countries within our data set with the capacity to skew our data distinctly. By isolating the period of time of our analysis, we were able to control for this variable. Additionally, by removing significant outliers within our data set allowed us to “normalize” our population. Most notably, a comparison of figures 1.1.5b and 1.1.5d accurately surmise that our treatment was effective.

Next steps

The purpose of our experiment is to run a regression on the rate of growth/(conraction) of emerging markets vs. developed economies. I’d like to determine by what degree growth in developed nations preceed growth/contractions in emerging nations. From an elementary perspective, this is an obvious correlation. However, by isolating our study, it may be possible to determine/identify various relationships including:

  • The lag between rapid change in growth in a developed nation v. an emerging nation
  • If any countries grow on a trajectory independent of developed nations

The first is relevant because the ability to identify this relationship may present a signficant market opportunity. If it is possible to identify the lag/lead time of an occurence in a developed nation, it may represent a significant signal to add/remove positions from various emerging economies.

Second, identifying countries that grow independent of developed nations represent significant opportunity for long term growth and minimized risk following uncontrollable macroeconomic factors.

Additionally, the purpose of this introductory treatment is to isolate special regions to observe later on. Recall that the next part of this analysis involves parsing out ETFs by country to develop a framework to follow important industries within each country to follow. By understanding these relationships from a macro perspective, it will be possible to gain greater context for how different “levers” in emerging markets may react relative to the broader economy.