The Big Mac Index and EM Currencies

 

The Economist’s Big Mac Index looks at the dollar cost of a hamburger sold by McDonald’s restaurants in some 60 countries. The index shows a remarkable range of prices around the world. In the latest survey, the most expensive burger was found in Switzerland ($6.62) and the cheapest could be bought in Russia ($1.65).  Presumably, these hamburgers are identical, with the same combination of bread, beef patty, lettuce and sauce in every unit. The price in each country should reflect the cost of the materials, labor and rent, as well as profit margins and taxes. The index pretends to shed some light on the relative costs of doing business in different countries, and, given that it has been measured for some 30 years, it can also provide an indication of the evolution of business costs. Moreover, it can be used as a proxy to  measure the relative competitiveness of currencies around the world.

The latest January 2019 Big Mac Index data confirms that the U.S. dollar is very overvalued. The two charts below show the evolution of Big Mac prices for countries in both developed economies (Left) and Emerging economies (Right), with the dashed lines showing the averages. In both cases, the dollar shows the most strength in nearly 30 years.

The two charts below, from Yardeni.com, confirm this dollar overvaluation trend for both developed and EM countries.  These charts measure the currency evolution of MSCI Indices (MSCI All Coubtry World ex U.S. for developed markets and MSCI EM fr Emerging Markets) relative to the USD. The overvaluation of the U.S. dollar relative to EM is key to the EM investment thesis, as when this trend turns it will provide a powerful boost for EM assets.

The next two charts show, first, the top twenty most overvalued currencies according to the Big Mac Index and, second, the cheapest 20 currencies (the numbers refer to the price in each country relative to the U.S. price).  Noteworthy overvalued Big Mac currencies for EM countries are Brazil, Colombia and Chile, all in Latin America. On the cheap side, India, Mexico, Indonesia, South Africa, Taiwan, Malaysia, Argentina, Turkey and Russia stand out.

The data is detailed below for the primary EM countries of interest to investors.

It is important to view the data in a country-specific historical context to understand what the data means. We look below at several specific cases.

Brazil

The two charts below show The Economist data since 2000 (left) and the Real Broad Effective Exchange-RBEE (right) as measured by the Bank for International Settlements  (BIS). The first thing to note is that the current relatively high valuation of the Brazilian real is not an anomaly. Except for a brief period in 2015, one has to go back to 2000-2004 to find a “cheap” real. The current “weakness” of the real appears largely explained by the strength of the dollar, which has appreciated against almost all currencies over the past eight years. The data is confirmed by the BIS RBEE data which shows the BRL to be about in line with its 25-year average. The BRL probably has some moderate potential for appreciation only if the economy experiences a robust economic recovery.

South Korea

South Korea appears as the second most expensive EM currency relative to the USD in Big Mac terms. The history shows that the USD price of the South Korea Big Mac has been stable over the past ten years, so the overvaluation of the won is due largely to other currencies becoming cheaper relative to the dollar. This is confirmed by the BIS RBEE which shows the won having appreciated significantly over the past decade. The strength of the won should present a headwind for investors in coming years.

Turkey

By any measure, the Turkish Lira is very undervalued.  The Big Mac Index shows Turkey at record-lows both relative to its history and compared to other countries. The is confirms by the RBEE which shows Turkey starting to rebound from near record-low levels. For an investor in Turkish assets, the very cheap lira should provide a strong boost to total dollar returns when the economy recovers over 2020-2022.

Russia

Russia provides an interesting contrast to Turkey. Though the Russia Big Mac is very cheap, it is only marginally cheaper than it has been for the past 20 years both relative to the USD and to other countries. The BIS RBEE shows that the ruble is only cheap relative to the peek of the 2008-2012 commodity boom but not relative to history. This points to relatively poor upside for the ruble, unless, of course, oil prices rally strongly.

India

India shows a significant relative appreciation in the Big Mac data for the past ten years, and its Big Mac has been increasing in price relative to other countries. This is confirmed by the BIS RBEE data which shows the rupee at a moderately high level on a historical basis. The rupee is likely to trade increasingly in line with oil prices as the country has become the biggest importer of oil in the world. Currency strength is not likely to be a boost to investor performance from current levels, unless oil prices collapse.

China

China’s place in the Big Mac Index has been gradually rising, and the price of a Big Mac in China relative to other countries has increased significantly over the past ten years. This is confirmed by the BIS RBEE which shows the consistent appreciation of the yuan over the past 15 years. The yuan has stabilized over the past 4-5 years and the future path of the yuan is not clear.

 

Trade Wars

India Watch

  • India looks to China to shape mobile internet (WSJ)
  • Amazon adapts to India (WSJ)
  • India’s love of mobile video (WSJ)
  • India’s potential in passive investing (S&P)
  • India’s food-delivery startup, Swiggy, backed by Tencent (SCMP)
  • Modi’s election troubles (WSJ)

China Watch:

  • Will China fail without political reform? (Project Syndicate)
  • S&P gets go-ahead to issue China debt ratings (WIC)
  • Stable growth expected for China’s Economy (AMP Capital)
  • China’s infrastructure spending to boost economy (SCMP)
  • The new Beijing-Moscow axis (WSJ)
  • Russia-China entente worries Washington (WSJ)
  • What next for China’s development model (Project Syndicate)
  • An entrepreneur’s tale of adaptation (NYT)
  • China boosts new airport spending (Caixing)
  • An analysis of nightlight points to overstated Chinese GDP (JHU)
  • China’s slowdown (CFE)
  • China’s GDP (Carnegie Pettis)

China Technology Watch

  • CTrip’s strategy (Mckinsey)
  • DJI’s rise (SCMP)
  • China’s decade-long Bullet-train revolution (WIC)
  • China’s lead in EVs and EV infrastructure (Columbia)
  • China’s high-flying car market (McKinsey )
  • China’s place in the autonomous vehicle revolution (McKinsey)
  • Can China become a scientific superpower? (The Economist)
  • The quantum arms race (tech review)
  • Baidu CEO says winter is coming (SCMP)
  • Zoomlion’s international ambitions (FT)
  • Ping An goes digital (Mckinsey)
  • China’s bet on AI chips (Tech Review)
  • China’s 5G push (tech review)

Brazil Watch

  • John Bolton’s Troika of Tyranny (The Hill)
  • The rise of evangelicals in Latin America (AQ)

EM Investor Watch

  • Globalization in Transition (mckinsey)
  • World Bank Report, Global Economic Prospects (World Bank)  
  • Indonesia’s economic populism (The Economist)
  • EM’s Corporate debt bomb (FT)
  • Holding’s digital transformation (Mckinsey)
  • Lowy Institute Asia Power Index (Lowy
  • In pursuit of prosperity (Mckinsey)
  • What drives the Russian state? (Carnegie)
  • Russia’s big infrastructure bet (WSJ)

Tech Watch

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