Political Research

Overview

Political and social developments are for the most part inseparable from economic drivers of risk and opportunity in the global economy and financial markets. But there are times when purely political factors play a decisive role.

In recent years, economic and political factors have become much more closely intertwined. The forces at work are larger than any single country or company, so even carrying out thorough economic research and due diligence will not be enough to give you the full picture. To avoid potentially costly decisions, it pays to seek out intelligence that will help you anticipate major events, in order to hedge or benefit from emerging global and regional risks.

Our Political Research Methodology

Our Political Analysts are In-Country

Our political analysts are based either in London or in the emerging countries that they cover. Being based in-country allows our team to ascertain how policy is set to change on a day-to-day basis. Our analysts do not only stick to the metropolitan and financial centres but also travel to outlying regions to gain a better overall perspective on state politics, regional economies, industrial practices and how policy is affecting economic outcomes.

We preserve our outsider's political judgement

Our emerging markets analysts may be embedded within the culture of the country they are monitoring, but will also have an outsider’s judgement – helping them to challenge perceptions and see beyond the obvious. They will put themselves in the shoes of the policy-makers, taking into account the effects of vested interests, societal pressures and the practicality of how and when policy is implemented.

Our political views are more nuanced

This allows us to formulate a more nuanced picture of how any given administration is likely to act over time, how its actions may have an impact on other economies and how it will react to both internal and external shocks. In addition, every high-conviction view is tested by our panel of senior analysts before being put into circulation, ensuring that each recommendation is backed up by rigorous discussion.

We appreciate evolving politics

By gaining this deeper level of understanding, we are able to appreciate the cumulative effects of policy over time and better predict the timing of forthcoming inflection points.

Services

Global Political Drivers

Detailed analysis of geo-political themes that drive global risk appetite among investors. (Fortnightly on Thursdays)

EM Watch

Analysis of global EM sentiment drivers and fundamental or policy country developments. . (Every Monday)

The GRID

Fundamental guide to emerging market growth drivers covering 10 major EM economies. (Monthly)

Brazil Notes

In depth on-the-ground analysis of the political forces that will affect growth and investor sentiment. Current themes: Temer corruption allegations, Lava Jato investigation, financial reform agenda and fiscal problems, Presidential candidates for 2018.  (Weekly on Thursday)

India Notes

On-the-ground coverage of political and policy developments that drive growth and investor sentiment. Current themes: Modi’s reform agenda, delivery vs. rhetoric, demonetization effects, RBI bed debt clean up and Goods and Services Tax roll-out.  (2 to 4 notes per month)  

Russia Notes

Market relevant analysis of domestic and geopolitical nuances and their impact on the economy and asset prices. Current themes: US and EU sanctions, oil prices and OPEC production deal, Syria risk and new elections in 2018.  (2 notes per month)

LatAm Notes

Regional coverage with emphasis on Mexico. Economists and strategists travelling to each region, supported by local sources.  (1 note per month)

EMEA Notes

Deep dive coverage of political risk and policy changes in Turkey, Egypt, Saudi Arabia, and GCC as a bloc. Focus on how politics affects fiscal policy and debt fundamentals.(2 notes per month)

SE Asia Notes

Regional coverage supported by local sources with emphasis on Philippines, Indonesia, Thailand, Malaysia. (1 note per month)

EM View

In-depth big picture analysis of global macro economic issues driving growth and asset prices. (12 per year)

Politics Research

Politics
09 Nov 2018

Global Political Drivers: US vs China shifts to simmer

  • This week’s US election points to continued trade war with China
  • Trump’s random trade-war walk will come out on a more gentle pace of tariff escalation
  • Political and economic incentives for slower motion are reinforced by the interplay of parallel US agendas
  • Less RMB depreciation may now be needed
READ ME
Politics
29 Oct 2018

Daily Note: Brazil: Election opens door for further reform

  • Far-right candidate Jair Bolsonaro wins runoff by a solid margin 
  • Bolsonaro must push an ambitious reform agenda – notably pension and tax reforms, plus privatizations – to put the economy back on track
  • He is likely to benefit from stronger growth and revenues in 2019
READ ME
Politics
26 Oct 2018

Global Political Drivers: Italy and the French white knight

  • The Italy threat is back: the ‘global’ and ‘political’ components of the threat are alive and well
  • Next up: a game of chicken between Italy and the EA establishment
  • Macron’s ride to the rescue has run into German political sands
  • He might have better luck installing his man at the ECB
  • Draghi is set to tee up an Italy-focused TLTRO for his successor
READ ME
Politics
25 Oct 2018

Russia: Supply-side drive

  • Russian economic policy is strongly biased to the supply side at the expense of domestic consumption
  • This cardinal feature applies across the board and in all time horizons
  • Two key policies exemplify this: pension investment plans and the champion fiscal rule innovation on the exchange rate (‘FXFR’)
  • Political risks to this agenda stem from already visible public disenchantment
  • These policy settings, while they last, are good news for the domestic DCM as well as all tradable and infrastructure-related sectors
READ ME

Track Record

Politics
16 Aug 2018

2018: Russian financial deepening a shock-absorber

Consensus said:

Russian geopolitical risk premium to hamper asset prices. 

We said:

Financial deepening is an important long-term driver of improved risk adjusted investment returns in EM. In Russia the short-term benefits are becoming clear. 

Monetary policy underpins the recent advances and brightening prospects of financial deepening in Russia, but fiscal policy is also contributing to the strengthening local bid that speeds recovery from periodic market turbulence. The aftermath of the latest sanctions scare this month will show this live benefit of financial deepening in action once again. An imminent and decisive breakthrough is the launch of a new pension investment system - reducing fixed income risk premium and particularly benefitting the equity market. 

Financial deepening is also creating opportunities in the here and now. Our first 'Exhibit' in this note highlighted the importance of the structurally stonger local bid for the OZF recovery from last April's sanctions shock. At the time of writing, only a week has passed since the latest bout of sanctions-related Russian market turmoil. Signs of stabilization are already apparent, and, once again, a prompt recovery is to be expected. These live episodes show financial deepening in action. 

Outcome:

Russian stocks rose from 2,261 on publication date to peak at 2,493 on 3 October 2018. Russian assets did not suffer as much as other EMs during risk-off episodes in autumn 2018. We attribute some of the relative resilience to financial deepening. 

Politics
05 Jul 2018

2018: Brexit noise a buying opportunity

Consensus said:

Risk of a no-deal crash out is too big to be ignored and is reflected in sterling weakness. 

We said:

Brexit-related noise in UK politics is rising to a new pitch, prompting a review of our existing call that the risk of a 'no-deal-crash-out is negligible. Noise means market volatility with sterling as ever in the front line. Noise is not only inevitable in a political process as fraught as Brexit but also an instrinsic feature of that process. The reason for this is brinkmanship. It is in the nature of such negotiations to go down to the wire. Moreover, the UK government has an interest in brinkmanship to improve its chances of persuading various potential rebel camps that they must choose between the Brexit solution on offer, however distasteful it may be to them, or the worse alternatives of Brexit never happening and/or a government collapse and the risk of Jeremy Corbyn's Labour coming to power. 

Periods of heightened volatility for sterling - and UK financial assets - are to be expected between now and next March. This volatility will reflect fears of a crash-out Brexit. Based on the political realities, such episodes should be viewed as opportunities to buy on weakness. 

 

Outcome:

Since publication there have been many moments of political deadlock, drama and fear. There have been 5 sharp sell-offs in sterling vs EUR and on each occasion sterling has bounced and the losses have been quickly recovered. Buying the dips proved to be a profitable strategy. 

Politics
25 Jun 2018

2018: Mexico - AMLO will win presidency and Congress

Consensus said:

Morena’s party alliance is unlikely to reach absolute majority in Congress

We said:

AMLO’s expected victory possibly represents the largest change in the political regime of the country in modern times. Moreover, his victory could lead to significant gains in congressional seats too, as Mexicans have historically voted for the same party in both the presidential and congressional ballots

Outcome:

Morena’s party alliance obtained a landslide win for the presidency and achieved an absolute majority in Congress in 1 July’s election

Politics
29 May 2018

2018: NAFTA deal is not imminent despite what some say

Consensus said:

A NAFTA deal is possible in May

We said:

The possibility of closing negotiations with a ‘skinny’ deal is a good sign for the ongoing trade talks, but the proposal is not credible

Outcome:

A NAFTA deal was not reached in May and the negotiation process paused for 2 months

Politics
17 May 2018

2018: Russia geopol risk premium overdone

Consensus said:

Geopolitical risk premium for Russia is soaring, with no end in sight. 

We said:

Despite the appearance of stalemate fraught with uncertainty, careful analysis of the causes of the latest sanctions escalation suggests a more positive conclusion that sanctions risk will now subside. Other things being equal, the US government will likely hold its fire on Russia for now. The Russian policies regarded by the US as 'malign' stem from what Russia perceives as vital interests. Those policies would only be changed or abandoned if the US retaliation against that 'malignancy' completely undermined Russia's economy and present political leadership. For the US, however, pursuing the goal of regime change in Russia comes at a price in terms of collateral economic damage that it does not seem ready to pay. Peak sanctions may be behind us. 

This more constructive turn of events is now more likely than the opposite scenario of yet more sanctions escalation. Since the threat of further indiscriminate US sanctions will continue to hang over Russia, the political risk premium will remain elevated. If, however, our prediction proves correct, that premium will look increasingly attractive. 

 

Outcome:

Russia's stock market rose from 2,324 at time of publication to an all-time peak of 2,493 on 3 October 2018. Russian assets and currency out-performed other EMs during risk-off episodes.  

Politics
03 May 2018

2018: Long, ugly trade clash looms

Consensus said:

Hopes were high that a US-China trade deal would be done quickly because: 1) it makes economic sense for both parties and 2) President Trump is a 'deal maker'. 

We said:

Contrary to the expectations of the media and many analysts, we believe the starting point for serious negotiations between US and China is some way off and that considerable time may be needed to get there. This week's US-China talks are likely to highlight the gulf between the two sides. 

As a result, the risk of tit-for-tat trade actions is heightened because it is unlikely that formal negotiations will start ahead of the original deadline set for the US to make a decision on imposing tariffs.

In the face of open-ended and ill-defined demands, China is unwilling to consider any compromises to the "Made in China 2025" programme. Moreover, it will remember its experience with Commerce Secretary Wilbur Ross, who apparently reached several agreements with Chinese negotiators last year only to have Trump throw them out when he returned to Washington. The Chinese side will want to know who speaks with authority for the US on trade and economic issues so as not to repeat the Ross experience. 

Detailed trade and economic negotiations are unlikely to get under way soon. We believe the most likely scenario for reaching serious negotiations will involve multiple deadlines and subsequent postponements, similar to what appears to be happening with the US-EU steel and aluminium talks, which have been postponed for another month. 

When negotiations finally come, they are likely to be long and ugly. 

Outcome:

No quick trade deal is done. Tit-for-tat tariffs are introduced and rounds of negotiations are delayed and cancelled. Investors gradually realise that trade war is real and increase risk premia priced into in stocks as a result. RMB falls by 9% vs USD between June and October despite Chinese authorities efforts to cushion the fall. 

Our Team

POLITICS

Jonathan Fenby

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Christopher Granville

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Elizabeth Johnson

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Marcus Chenevix

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Amitabh Dubey

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Grace Fan

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Constantine Fraser

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Madina Khrustaleva

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Eleanor Olcott

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ECONOMICS

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