Recent global commodity price weakness has favored several emerging Asian markets at the expense of commodity exporters in Latin America, Eastern Europe, and the Middle East.
After peaking in early 2018, global metals prices declined during the second half of the year. Global oil prices held relatively firm until the fourth quarter, but then weakened substantially.
In order to gauge the impacts of these commodity price movements on different countries, we calculate proprietary terms-of-trade indexes for a broad group of developed and emerging markets. A country’s terms-of-trade is defined as the ratio of its export price index to its import price index. An increase in the ratio improves a country’s real income, which tends to stimulate domestic demand. Conversely, a decrease in the ratio hurts a country’s real income and thereby tends to dampen domestic demand.
Our preferred measure of the terms-of-trade trend is based on the percentage change in a country’s terms-of-trade over the previous 18 months. Based on this measure, terms-of-trade trends are currently positive in several Asian commodity importers, including South Korea, Taiwan, and India (see the table below). Conversely, terms-of-trade trends are negative in several commodity exporters, including Russia, Qatar, Peru, and Chile.
Our research shows that equity markets in countries with positive terms-of-trade trends tend to outperform equity markets in countries with negative terms-of-trade trends. This is not a hard rule, but it is an historical tendency.
Our emerging market country allocation recommendations are published each month in the Emerging Markets Equity Allocator. The recommendations are based on a multi-factor model that incorporates indicators of valuation, growth, risk, monetary policy, and momentum. Our terms-of-trade indicator is an integral component of the allocation model.