From the CEO – February 2018
With volatility and risk remaining at relatively high levels following the global sell-off (and partial recovery) in equities earlier this month, we’ve received several calls from clients about oil prices and how political risk might affect them.
The inquiries are relevant as the return of risk to the market has made asset selection – oil being one possible asset – important, once again. And oil prices are instructive to PRS’ work given a seminal study undertaken by Robert Weiner and Reid Click, professors at George Washington University, that used our data to determine the relationship between oil prices and political risk. (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=971147)
Speaking of political risk and oil, Venezuela is once again in our clients’ sights as an election has been called for April 22nd. The opposition coalition is boycotting the vote as two of its most popular candidates – Leopoldo Lopez and Henrique Capriles – have been banned from participating. Other parties have been prohibited from running, too.
However, Henri Falcon, a former mayor of Barquisimeto and governor of Lara State, and one other politician, have announced their candidacy, complicating the presidential race and presumably fueling some discord within the ranks of the opposition.
PRS’ risk ratings have been very low (high risk) for Venezuela for some time and US-imposed sanctions are currently complicating the restructuring of some $1.9 billion in debt. On the election itself, we are penciling-in a Maduro win, but so many other issues of real significance are plaguing the country that we don’t see his tenure to be a long-lasting one. The central bank has recently engineered a devaluation, and a refugee crisis is beginning to take shape.
On our ratings this month, two countries stand out. Latvia’s political risk rating took a tumble as the head of the central bank was arrested on corruption charges for demanding a bribe. Ilmars Rimsevics has responded by saying that he is the target of an effort by several banks to have him removed from his position.
Meanwhile, separately, Latvia’s third-biggest bank sought emergency financial support after American officials accused it of money laundering, which included handling transfers to organizations linked to North Korea.
Also seeing its risk profile deteriorate was Syria, as US support for People’s Protection Units, the armed wing of the Kurdish Democratic Union Party, is doing very little to help mend ties between Washington and Ankara. The Kurds are focused on a new Turkish offensive, which is depriving the US of a critical fighting force in its efforts to eliminate the last vestiges of the Islamic State from the country. The situation overall is likely to get worse before it gets better, further strengthening President Bassar al-Assad’s grip on power and allowing many foreign fighters to leave the country and to possibly create terrorist incidents in Europe or Africa.
One asset for which our models see considerable support is the US dollar against most of the major currencies we follow. Jay Powell, the new Fed chairman, has remarked on the overall strength of the American economy and the need for rate increases this year, which has sent the greenback higher.
Additionally, PRS’ prop trading desk began shorting the euro recently, given the currency’s remarkable run against the greenback over the past six months and given some of the issues affecting the March 4th Italian election. A good showing by the populist parties could halt much needed economic reforms in the country and cast doubt on the overall strength of the eurozone’s upward growth trajectory.
Incidentally, PRS also has a tight short on Italian equities and some other currencies, including the Canadian dollar, as Prime Minister Trudeau’s support falters, uncertainty over the fate of the NAFTA talks continues, and as personal debt reaches historic highs.
Clients and friends of PRS should note that, beginning in this quarter, PRS will be producing what we have tentatively called “ICRG-Plus” – a ten country data series (covering all ICRG tables) for the following emerging, frontier, and offshore markets: Macao (China), Cambodia, Uzbekistan, Laos, Turkmenistan, Tajikistan, Kyrgyzstan, the Cayman Islands, the British Virgin Islands, and the Marshall Islands. Most of these increasingly important investment destinations are not covered by others – and clearly do not benefit from our proprietary, quant-driven models!
Be sure to contact the NY office at (315) 431-0511 for full details and pricing.
Finally, ICRG data will be featured in a new book by Professor Michel-Henry Bouchet, a distinguished professor of finance at Skema Business School in Paris, dealing with country risk and globalization. Until 2016, Dr Bouchet was also Chief Strategist of North Sea-Global Equity Management.
I’ve had the pleasure of reading some of the proofs and I can say this book is the first serious treatment of the discipline since the 2008 financial crisis.
Going beyond the traditional approaches to country risk assessment and developing a more precise look at risk than previous efforts by scholars, indispensable attention is paid to the importance of information sources and the various (and often overlooked) ‘contamination channels’ of country risk.
The chapters dealing with market price signals for country risk, capital flight, and the array of risk mitigation techniques available to managers are worth the price of the book alone.
Country Risk in the Age of Globalization will be released by Palgrave this year. Consult Professor Bouchet’s site for updates on the release date (https://www.developingfinance.org/biography).
Clients will note that some 50 countries had their political risk profiles adjusted this month, affecting about 70 individual risk metrics.
Thanks for your continued support, and please contact us if we can be of any assistance.
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