Does the Organisation for Economic Co-operation and Development, or OECD, lead indicator forecast the Indian stock market accurately?
The latest indicators to start flashing green are several of the OECD composite leading indicators (CLIs). For instance, the CLI for the euro area ticked up from a reading of 93.9 in February to 94.2 in March, while the CLI for the five major Asian countries (China, India, Japan, Korea and Indonesia) moved up from 92 in February to 92.2 in March.
In the OECD’s CLI lexicon, any increase below 100 is classified as a recovery, while an increase above 100 qualifies as an expansion. The CLI for China has gone up from 91.7 in January to 92.1 in February and now to 93 in March.
The CLI for India, however, continues to decline, falling from 92.9 in February to 92.6 in March. The only consolation is that the pace of decline has been tapering off.
How reliable is the OECD CLI as a tool to forecast recoveries? A recent report by Macquarie Securities points out that “it is an extremely important indicator for Asian equity markets. Its relationship with MSCI Asia ex-Japan is remarkable and extends over a long history”. The report looks at country performance in Asia during previous episodes of a rising CLI and finds that “Korea is the standout way to play the OECD LI, strongly outperforming when it is rising and underperforming when it is falling. Singapore and Malaysia also tend to be high. Hong Kong and Taiwan are consistent underperformers in a rising OECD LI environment”. The Indian market, though, is not a great underperformer when CLI falls, nor is it a big performer in the Asian region when the CLI rises, possibly because of the more insular nature of our economy.
But how successful has the OECD CLI for India been in predicting turning points? During the dot-com bust, the CLI for India started to fall from its peak in March 2000 and slipped below 100 in November. Thereafter, the first sign of a recovery was seen in the CLI in March 2002. The expansion phase, or a reading above 100, was reached by the Indian CLI in December 2003. During the period, Indian GDP growth was 6.4% in 1999-00, 4.4% in 2000-01, 5.8% in 2001-02, 3.8% in 2002-03 and 8.5% in 2003-04. We could say then that the drop in GDP growth in 2000-01 was forecast by the CLI, but not the recovery of 2001-02 or the fall in 2002-03. But the expansion of 2003-04 was foretold.
Now consider the markets. The Sensex reached a high in February 2000 before starting to fall, which means it turned about nine months before the Indian CLI. The Sensex then reached its lowest point in September 2001 and though it bounced back thereafter it hung around the 2,900-3,500 levels all through 2002. And it started moving up decisively from May-June 2003, which means it again led the CLIs by five-seven months. What’s more, the CLI for India turned below 100 for a few months from April 2004. And last year, the CLI started falling from its peak from February 2008, while the Sensex reached its peak in January 2008, which means it didn’t really predict the downturn.
So the OECD India CLI has not been a great tool for forecasting either India’s stock markets or its economic growth.
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