From the CEO
The American election of Donald Trump in early November took many by surprise, replicating to some extent the same sense of incredulity in the polling data leading up to the vote as was felt in the aftermath of the Brexit plebiscite in the summer.
Despite some dire predictions of a Trump win – the most immediate of which was that the stock market would sell-off and the global economy would tip into recession – PRS took a more analytical and balanced approach two months prior to the election, suggesting to clients that it was ‘very probable that a Trump victory would result in Republican domination of both the executive and legislative branches of the federal government.’
We know the stock markets in the US opened higher the morning following the vote: the underlying logic being that a Trump victory would (now) include corporate and personal tax cuts, increased spending on infrastructure and some re-consideration of existing trade agreements that might be more beneficial to the US. Consequently, growth would be higher, and inflation would be stoked, prompting the Federal Reserve to raise rates. Not surprisingly, bond prices in the US have been falling since the election and the greenback has been on a tear against other major currencies.
Indeed, several of Trump’s early cabinet picks seem to underscore his election promises of lowering taxes and generally being more favorable to business. His choice for the head of the treasury is Steve Mnuchin, Trump’s campaign finance chair and former Goldman Sachs banker. Investor Wilbur Ross Jr., known for restructuring failing firms and a longtime associate of Trump, was selected as the new cabinet’s commerce secretary.
Looking ahead, PRS sees the US economy continue to growth at a relatively healthy pace and the US dollar to continue to hold its own against the majors. The American economy is now estimated to have growth 3.2% in Q3, up from an earlier estimate of 2.9%. This is the fastest pace of growth since the third quarter of 2014. Much of the higher growth has been fueled by higher consumption, and we expect growth for Q4 to be higher than the longer term trend of 1.8%.
Meanwhile, some oil-sensitive currencies, such as the Russian ruble and the Norweigan krone,
received a boost at the time of writing as the price of oil popped some eight percent on news that OPEC members are close to a deal that would cut the cartel’s production by more than one million barrels a day (from a total 33.6 million barrels a day to 32.5 million barrels per day – about 1% of global output.)
There are some impediments to closing the deal, notably Iran, which said it would pull back production next year after regaining some of the market share it lost as a result of sanctions. But most involved have said publicly an agreement is likely.
The consequences of not striking a deal are significant: oil prices would continue to languish over at least the short- to medium-term; the balance sheets of oil companies would sag; the greenback would continue to be strong against oil currencies; and, while there would be continued efforts to diversify their economies (amid further borrowing to finance budget deficits) overall levels of country and political risk would continue to be elevated for OPEC members’ as their economies suffer further and possibly slip into recession. This possibility makes the likelihood of a deal greater, which says nothing about the reputation of OPEC should it fail to secure a production cut.
Assuming an OPEC deal arrives, attention will then shift back to Europe and, in the most immediate term, the Italian referendum December. President Renzi has said that he will resign his post if the plebiscite fails, although recently he’s backtracked a little. Polling – for what it’s worth now – indicates a close race but those supporting a rejection of the referendum are ahead.
However, should Renzi resign, the opposition 5-Star Movement would not necessarily be the new government. Renzi could be replaced by (for lack of a better phrase) an ‘investor-friendly, technocratic regime’; and given that the reforms put forth in the referendum do not depend on parliamentary approval (they can be undertaken by decree), overall levels of political risk – and the extent to which investors might become increasingly jittery about Italy’s prospects – might be unnecessarily elevated or at least short-lived. Further, even if 5-Star Movement prevails, Italian law suggests that it might not be able to hold a vote on the country’s membership to the EU or the EMU.
Looking at ICRG’s risk ratings this month, several changes are worthy of note. In terms of an improving political risk profile, Panama’s president, Juan Carlos Varela, is likely to retain support from half of the Partido Revolucionario Democrático legislators, despite having his popular support numbers fall again. However, the risk of social instability is easing as the economy is doing rather well along with the influx of Western investors and retirees.
Similarly, France’s risk profile has improved, as Francois Fillon secured the nomination of the center-right les Republicans, who are expected to win the next election. The former prime minister in the former Sarkozy regime and current mayor of Bordeaux is somewhat decisive but appears willing to work with the incoming US administration and supporting a rapproachement with Russia’s Vladimir Putin as it affects the civil war in Syria. On the economic side, France’s manufacturing sector’s output has improved, and consumer confidence levels are trending upward.
On the negative side, Congo Republic is suffering from bouts of instability – especially in the Pool region – as the local population clashes with rebels amid a government crackdown on dissent. There are also incidents of gas shortages, and terrorist activities (based on ethnic cleavages) continue. Moreover, the government missed a Eurobond payment earlier in the year, although it claimed it was due to a clerical error of sorts. Higher and sustained oil prices will help the government’s coffers.
Meanwhile, PRS’ data continues to be used widely. As is the case monthly, the IMF produced a very interesting study – using ICRG composite risk data – to explain public debt spikes, the related impact of stock-flow adjustments, and the overall significance for proper debt sustainability analyses. (https://lnkd.in/eYEmb6d).
The Fund also used our political risk data to highlight the factors that influence market depth in emerging markets, using Chile’s stock market as the case study. (https://lnkd.in/e7Gnzc4) .
Speaking of data – especially in the world of ‘Big Data’ – it’s worthwhile to note the CountyData Online – one of our flagship products – produces some 7,500 data points monthly (either added or updated), which translates into 90,000 data points annually, affecting in total 140 countries. The data series extends nearly 40 years.
I mention this because the firm is in the early stages of a partnership with Queen’s University’s InnovationXL ecosystem in an effort to further develop our political risk data and forecasting methods that will more closely align themselves with the interests and trading stratagems of institutional investors and hedge funds – groups that currently form a burgeoning segment of PRS’ client base.
Finally, clients of ICRG should note that some 60 countries (of the 140 covered) had their political and/or economic and financial risk profiles adjusted, affecting 75 political risk metrics.
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