portfolio investing and political risk in emerging markets

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Alison Adams, PhD Boston Economic Club June 10 th , 2009 Alison Adams Research 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 Presentation

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Page 1: Portfolio Investing and Political Risk in Emerging Markets

Alison Adams, PhDBoston Economic Club

June 10th, 2009

Alison Adams Research

Portfolio Investing and Political Risk in Emerging Markets

Page 2: 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

Page 3: Portfolio Investing and Political Risk in Emerging Markets

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

Page 4: Portfolio Investing and Political Risk in Emerging Markets

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.

Page 5: Portfolio Investing and Political Risk in Emerging Markets

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

Page 6: Portfolio Investing and Political Risk in Emerging Markets

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

Page 7: Portfolio Investing and Political Risk in Emerging Markets

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.

Page 8: Portfolio Investing and Political Risk in Emerging Markets

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

Page 9: Portfolio Investing and Political Risk in Emerging Markets

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

Page 10: Portfolio Investing and Political Risk in Emerging Markets

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

Page 11: Portfolio Investing and Political Risk in Emerging Markets

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

Page 12: Portfolio Investing and Political Risk in Emerging Markets

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

Page 13: Portfolio Investing and Political Risk in Emerging Markets

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.

Page 14: Portfolio Investing and Political Risk in Emerging Markets

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