119March2019|DEEPDIVEEMStrategy:InferringcreditcyclesfromEMassetpricesProposedapproachEconomiccycles,alsoknownasbusinessortradecycles,refertotheeconomy-widefluctuationsinproduction,tradeandgeneraleconomicactivity.Fromaconceptualpointofview,acycleisoftendefinedbytheupwardordownwardlong-termtrendofrealGDPandothermacroindicatorssuchasindustrialproduction,real-income,employment,sales,etc.Bottomoutcycles,forexample,areusuallycharacterizedbyperiodsofsignificantdeclineineconomicactivityacrossthewholeeconomy,orbytwoconsecutivequartersofdeclineinrealGDP.However,webelievethatmarketagentscansometimesreactfasterthanrealGDPwhenassessingtheimpactoflowereconomicactivity,therebydirectlyimpactingassetprices.Unlikethestandardapproachtoeconomiccycles,whichusesmacroeconomicvariables,weusedonlyemergingmarketsassetpricestomeasure(i)thestageoftheeconomiccycleineachcountry,(ii)thedurationofthecurrentcycle,(iii)thepaceofacceleration/deceleration,and(iv)howlongthecurrentcycleislikelytolast.Sinceourgoalwastoextractmarketperceptiononwhereselectedemergingmarketsareintermsofeconomiccycles,weonlyusedmathematicalmethodstodefinethecurrentcycleinsteadofusingregressingvariablesormakinghistoricalassumptions.LATINAMERICASTRATEGYPleaserefertoimportantinformationattheendofthereportDEEPDIVE|EMSTRATEGY19March2019GabrielGerszteinGlobalHeadofEmergingMarketsStrategy+551138413421LucaMaiaFX&IRLatinAmericaStrategy+551138413447BancoBNPParibasBrasilS.A.KEYMESSAGESWhenitcomestoassessingeconomiccycles,theconventionalapproachistogatherandsortouteconomicvariablestodeterminethephaseofthecreditcycle.Whatifwecouldmodelthedatainsuchawaythatweareabletoinferthephaseofthecyclesfrommarketprices?Withthatobjectiveinmind,wehavedesignedaquantitativetoolthatusestheperformanceofselectedfinancialassetstoextracttheimpliedstageoftheeconomiccycle.ResultssuggestthatcurrentmarketpricesimplythatBrazilisintheearlystageofthecreditcycle.SouthAfrica,Indonesia,USA,andTurkeyhavealreadyenteredintothelatephase.Indonesiaisstillinthemidofthecycl...
