The Economist’s Big Mac Index ( Link ) 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 ($7.29) and the cheapest in Russia ($1.81). Presumably, these hamburgers are identical, with the same combination of bread, beef patty, lettuce and sauce. The price in each country should reflect the cost of the materials, labor and rent, profit margins and taxes. The index aims 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 Big Mac data confirms the strength of the USD following a 9-year period of USD appreciation against both developed and emerging market currencies. EM currencies are inexpensive compared to the high levels of 2007-2011 and generally in line with long-term historical levels. Competitive currencies, low earnings multiples and higher GDP growth compared to the United States are the foundation for a positive outlook for EM stocks. Some noteworthy developments are as follows:
Brazil at last has finally fallen from the high relative price levels it has experienced since the early 2000s, and is now placed towards the middle of the pack. Given the bad state of the economy and the significant depreciation of the BRL that it is not even lower is indicative of the high structural costs of doing business (taxes, regulations).
Most Asian currencies are perennially cheap, as governments intervene to support export competitiveness. South Korea and Thailand are straying from this a bit. This may be a natural evolution for Korea but a potential problem for the much less productive Thai industry.
Turkey, Russia and South Africa are dirt cheap and can be expected to bounce back when their economies move up the business cycle.
Mexico is well positioned to benefit from reshoring of manufacturing to North America.
