portfolio investing and political risk in emerging markets
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Portfolio Investing and Political Risk in Emerging Markets. Alison Adams, PhD Boston Economic Club June 10 th , 2009. Use Political Risk Rather than Manage it. In a reactive sense, political risk has been seen as something to be avoided or managed - PowerPoint PPT PresentationTRANSCRIPT
Alison Adams, PhDBoston Economic Club
June 10th, 2009
Alison Adams Research
Portfolio Investing and Political Risk in Emerging Markets
Use Political RiskRather than Manage it
Alison Adams Research
In a reactive sense, political risk has been seen as something to be avoided or managed
For dedicated portfolio investors, political risk can be anticipated and exploited for enhanced returns
Getting ahead of planned and unplanned events is the key
Structures and Style vs. Expertise
Alison Adams Research
Expertise is particularly useful for FDI, company specific intelligence, and lobbying.Upside: detailed analysis, sense of proximity
to power, networkingDownside: too close to the subject, often
biased, and unduly pessimistic, experts have a bunker problem and often do not have a sense of scale
Research shows that experts have a poor record for predictions about subjects they know very well
Structures and Style: Foundations for Using Political Risk
Alison Adams Research
Political StructuresUpside: timing and rules, facilitates comparison
with peers, facilitates organization and ranking of detailed information
Downside: can be too broad, can encourage over confidence
Political StylesUpside: preparation for unscheduled events,
facilitates comparison, anticipate policy decisionsDownside: can be too broad, encourages over
confidence, style can be malleable.
Non-tradable Political Risk
Alison Adams Research
Strategic risk: tends to be slow moving and not conducive to an investment strategy. For example, N. Korea, Iran, and Russian expansionism
• Terrorism: tends to be opportunistic and impact is local and temporary. For example, bombings in India, Turkey, and Thailand
Extremely important for governments but not necessarily for economic performance
Tradable Political Risk
Alison Adams Research
Scheduled events and anticipated volatilityLocal and national electionsSummits
Unscheduled events and reactive investingProtests and popular unrestGovernment collapseScandal and corruption
Political Structures
Alison Adams Research
Parliamentary Systems:Presidential Parliamentary Systems:Presidential Systems:
Each structure affords different investment opportunities for the portfolio investor in the form of contrarian views and appropriate risk aversion.
Parliamentary System
Alison Adams Research
Parliamentary systems are generally:Low risk and slow to changeCoalition governments disperse ministries
according to interest. i.e. the Left gets the Labor Ministry
Take alarmist views with a grain of salt. For example, the recent election in India
I would generally view long positions as secure
Presidential Parliamentary Systems
Alison Adams Research
Range from benign to unstable; a case by case reading is necessaryPresident versus Prime Minister is unstable:
UkrainePresident with the Prime Minister is stable:Turkey-before and after President Gul
Presidential Systems
Alison Adams Research
Presidential systems can change direction substantially in a winner take all contextRegime change can be deep in key ministriesBusiness/government relationships
vulnerablePolling is crucial to determine long: short
decisionsBig bets are possible: Brazil and Lula’s first
term; AMLO’s loss in Mexico
Political Style
Alison Adams Research
Why it matters for policy analysisIn opaque policy situations, political style is a
powerful guide to anticipate policy decisions. i.e. Ecuador’s default
Rule of law is not clear but style is clear. i.e. Putin and TNK-BP; Erdogan in Turkey
It matters to the politicians themselves and defines limits of loyalty and discipline. i.e. ANC National Executive Committee in South Africa
Debunking Political Assumptions
Alison Adams Research
In Emerging Markets –all political parties believe in state sponsored growth to one degree or another.
At this point, most political parties are reasonably market friendly. (Ignore swing to the left labels)
What matters most is the quality and quantity of technocrats and willingness to establish best practices. AKP in Turkey, PAN in Mexico
Anticipating Policy Change
Alison Adams Research
Not an exact science; but there are clear tendencies.Transparent democratic processes produce more
populist policyOpaque committee processes produce more
balanced resultsCivil Law tradition courts usually do not make new
law [a notable exception is Turkey’s Constitutional Court]
Presidential decrees will be arbitrary and difficult to anticipate. i.e. Argentina and Venezuela
Rent seeking behavior around natural resources is inevitable.
Conclusions:
Alison Adams Research
It is possible to use political risk to maximize returns
Political risk is endogenous to emerging markets
Risk must be put in a relative contextNot all risk is tradable
Presentation is available at www.alisonadamsllc.com