From the CEO – October 2018
The gyrations and sell-offs of most asset classes during October continued as ICRG was going to press. Clearly something that I spoke about in previous client letters given stretched valuations, rising interest rates, trade issues, weakening global growth – the latter witnessed in part by falling consumer confidence levels in Europe and elsewhere during the summer – the talk now is about whether the time is ripe for stepping back into the markets now or waiting for some key event to run its course, such as the US mid-terms in November. According to our risk portfolio models, a rally is in order very soon, but the question remains whether it is sustainable. I have my doubts.
Also clouding the picture for some investors and indeed for political risk is the unfolding of new events surrounding the death of journalist Jamal Khashoggi. There has been and will continue to be much ink spilt as new information surrounding the death emerges, but the verdict is out on whether investors will (or could) be deterred from investing in the Kingdom.
When I was in Riyadh earlier this year addressing members of the business community and government, I spoke about the inclusion of Saudi Arabia in the FTSE Russell and MSCI indices, and how it would see trillions of dollars in investment funds funnel into the country.
As was reported in CNBC, EFG-Hermes Holding estimates that the upgrades of Saudi to emerging markets status by the two indices could bring between $30 billion and $45 billion into Saudi stocks. There was $1. 9 trillion benchmarked against the MSCI Emerging Markets Indexes as of year-end 2017. The three main emerging markets ETFs that use the MSCI benchmarks have roughly $150 billion in assets.
There has been some push back by at least one US state government institution to have the index providers reconsider their decision. But despite this request, it remains that the upgrade to emerging market index status tends to be a plus for the country’s equity market, which suggestions that stocks rise for about a year and a half prior to the classification.
So far this year Saudi equity market has done well, and a number of independent studies conducted using ICRG risk data since the 1990s have found positive and statistically significant relationships between our financial and economic risk metrics and emerging market equities, and the Saudi stock exchange in particular. (https://lnkd.in/e3W8knB)
PRS continues to make its views known in the press. This month we spoke about the implications of a second-round victory by Jair Bolsonaro in the Brazilian election (https://www.bloomberg.com/news/articles/2018-10-06/risk-consultant-prs-plays-down-risk-of-bolsonaro-s-populist-past).
We also addressed the issue of the upcoming election in the DRC, noting that we didn’t “see the corruption that has been dominant [in the political system] changing.” (https://lnkd.in/eRRnFYn ), along with the challenges facing the UK prime minister in getting any deal past parliament and the voters on CNBC. (https://www.msn.com/en-ca/video/financenews/mays-got-an-uphill-battle-politically-in-the-uk-prs-group/vi-BBOAeuM?ocid=st)
We also spoke to Nigerian business TV on the global economic slowdown and how it will affect emerging markets. (https://www.youtube.com/watch?v=4PjIJwI2qJo&feature=share
Turning to our ratings this month, the Americas saw some upgrades (Brazil, Jamaica) but also a general deterioration in consumer confidence levels (Peru, El Salvador, USA) as the coming slowdown in the global economy has evidently begun to take hold.
Over in Asia, we saw China’s political risk increase given issues affecting debt-load, a fall-off in consumer confidence, a market in retreat, and a currency (yuan) that continues to weaken against the US dollar. Additional tariffs placed on a variety of Chinese exports has not helped matters, nor has the tightening of credit. In terms of political risk, China is now in the “high risk” category and has been in that grouping since July.
Myanmar’s risk profile also took a hit in October, as a public sector wage hike angered the larger population and as garment workers went on strike. The kyat, the currency, depreciated against the greenback and other major currencies, producing fuel price inflation.
Over in Africa, South Africa got a slight boost in its political risk rating as a new finance minister was appointed, Tito Mboweni. The former governor of the central bank, the appointment appears to have boosted the confidence of investors going forward, as the rand rallied on the news.
Conversely, Cote d’Ivoire’s political alliances are breaking down and recent local elections were marred by violence. The unrest does not bode well for next year’s presidential vote, made worse by slowing growth, which will not likely turn around for emerging markets anytime soon.
And, in Western Europe, France and Germany went in opposite directions on the political risk index, but only marginally. France’s president, Emmanuel Macron, shuffled his cabinet in the face of last month’s ministerial resignations, but the move is not likely to do much to raise the government’s not-too-impressive popularity numbers or have a substantial effect on policy going forward. In Germany, despite some of the recent travails of Angel Merkel, the poor showing in the Bavarian state election by coalition partner, the Christian Social Union, suggests the party has been sufficiently too weakened for the time being to pose much of a problem in maintaining coalition cohesiveness.
Finally, October’s ICRG saw some 60 changes to its various political risk metrics, affecting just under 50 of the 140 countries covered.
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