Why I think EM should be trading at discount (1)

The conviction of the former head of Greek statistics a few months ago should open the eyes of global investors to the risk of emerging markets (EM) economic data.

Mr. Andreas Georgiou is accused of being difficult to work with, and presents economic data without negotiation and approval from the Greek government.

The creditors and academics criticize the actions of the Greek government that punish Mr. Georgiou because Greece is considered to have blamed Mr. Georgiou solely for the errors of economic policy taken by the New Democracy party.

Investors should be aware, that events occurring in Greece can occur in any country. Especially in developing countries or emerging markets. Therefore, investors should examine more deeply the economic data presented by the government.

In my opinion, at least there are some things that make economic data in developing countries become less valid.

The first is the lack of supporting economic data devices. The process of collecting data to get accurate output is a tiring and costly job, especially in some countries that have more challenging conditions. A country needs to equip and finance this data collection process well. And this of course requires a lot of money. If the government is not seriously committed in this matter, do not rule out the possibility that the economic data presented is not accurate.

The second is the government’s deliberate intent, for the sake of demonstrating successful government performance so that the governance can be re-elected.

The third is the absence of counter-institution that verify the accuracy of the data presented by the government. For some cases in developed countries, many institutions are developing statistical calculation methods for their own purposes. Inaccurate data from government can be detected through inconsistencies with other data measured by other institutions. The presence of rich institutions in developed countries (hedge funds, brokers, etc) allows for such a process of re-examination.

Government economic data is very important, because it is often used as a reference for business and investment decisions. Although it is impossible to present 100% accurate economic data, at least the margin of error should be kept as small as possible.
Some examples of consequences of economic data inaccuracy are:

• The occurrence of wrong economic decisions. For example: if the inflation data presented by the government is much lower than the reality, then the workers will suffer because the salary adjustment is much lower than real inflation, which means their purchasing power slumped.
• The price of assets is wrong. Because the inflation data presented is low, the risk-free-assets yield is low. This risk-free-assets yield is the benchmark for other assets, including the price of corporate bonds and stocks. Artificial inflation data leads to high overall asset prices, and can trigger an assets bubble in the long term.

I am not suggesting that investors do not trust all EM economic data, but for investors to see EM economic data with a grain of salt. For those who are smart will carefully analyze the data before making economic decisions. In some countries, adjustments to the data are still required. Alternatively, investors should demand a higher margin of safety. 

To check the status of countries, you can start from: https://en.wikipedia.org/wiki/Emerging_markets

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.