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 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.
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.
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.
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.
Detailed analysis of geo-political themes that drive global risk appetite among investors. (Fortnightly on Thursdays)
Analysis of global EM sentiment drivers and fundamental or policy country developments. . (Every Monday)
Fundamental guide to emerging market growth drivers covering 10 major EM economies. (Monthly)
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)
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)
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)
Regional coverage with emphasis on Mexico. Economists and strategists travelling to each region, supported by local sources. (1 note per month)
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)
Regional coverage supported by local sources with emphasis on Philippines, Indonesia, Thailand, Malaysia. (1 note per month)
RMB response - the unlucky number 7
Growth stabilization in China now hinges on the interplay between trade tensions and policy support. Although China is likely to maintain its policy of measured retaliation against US tariffs, it is clear that higher tariffs will weigh on China's short-term economic activity and planning. We expect the authorities to tone down language about 'structural deleveraging' in the face of this uncertainty and to scale back their previous commitment to stabilize the renminbi in order to gain greater policy latitude.
On trade talks, the next key event is the G20 Osaka meeting between Xi and Trump. We believe the prospects of reaching a trade agreement in Japan are now dim. The likely outcome is that Trump will set another deadline of three to six months for a deal to be struck and if there is no agreement by that time, he will press ahead with the threatened tariffs on another US$300bn worth of Chinese goods.
Without a trade deal or material trade war de-escalation in the next three months, the RMB will break the USD-CNY 7 level in H2/19. Since RMB stability has been conditional on good-faith negotiations, we think Beijing may now choose to let the currency passively devalue against USD and the currency basket in order to partly offset the latest tariff escalation. However prior to the G20 summit China will defend the 7 level to avoid further inflaming tensions.
The Chinese authorities intervened to keep the RMB stable until the G20 summit. As we predicted a trade war 'truce' was announced but it did not last and China allowed the USD-CNY to fall below 7 on 5th August causing massive selling in global risk assets.
RBI expected to keep rates on hold at their February meeting.
The new RBI chief will be more amenable to the government's demands. Das seems inclined towards easier monetary conditions and could help start a rate-cut cycle as early as February.
On his first day in office in December, Das said that the inflation outlook was benign. With headline CPI inflation well below the central bank's 4% target for the past five months, the RBI faces pressure to cut interest rates now. Das may take a more pro-growth view, and the forthcoming 7 February monetary policy committee meeting - the first under his governorship - will clarify his view on inflation. As the RBI governor, Das holds the casting vote in the event of a tie.
RBI cut rates by 25bps in a move which shocked markets and analysts.
Opinion polls had shown the BJP leading in Madhya Pradesh and Chhattisgarh, but behind the Congress Party in Rajasthan.
There is a real possibility of a BJP loss in all three states currently governed by the Party in its heartland stronghold of Rajasthan, Madhya Pradesh and Chhattisgarh, and such an outcome will spook investors who have been counting on Modi's re-election next year. A BJP defeat in the polls will likely increase pressure on Modi to ramp up spending with all the resulting macroeconomic risks and market volatility.
BJP was defeated in all three state elections and, at the time of writing, look likely to lose their majority in the general election to be held in April and May 2019.
Deputy Governor Viral Acharya's speech last Friday on central bank independence brought the rift between the government and the RBI glaringly out into the open. The RBI appears to have forced the government to back off, at least for now, with the Finance Ministry finally saying that it respects the RBI's autonomy as it sought to calm jittery investor nerves.
The RBI's top leadership has made it evident that it will stand its ground on the three issues it has specifically mentioned - the state-run banks, the use of its reserves and its regulatory scope. But Governor Patel's days as the RBI chief seem to be numbered.
Governor Patel resigned on 10 December 2018. Investors remain wary of the government's attempts to influence RBI policy and their independence remains at risk.
Russian geopolitical risk premium to hamper asset prices.
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 stronger 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.
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.
Risk of a no-deal crash out is too big to be ignored and is reflected in sterling weakness.
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 intrinsic 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.
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.
Jonathan Fenby has covered China for 20 years, focussing on policy and the politics of the regime, and their impact on the economy. Former editor of the South China Morning Post, he has written eight books on China and visits the country several times each year.
His involvements with Europe dates back to 12 years covering France and Germany for the Economist, the London Times and Reuters. He has a widespread network of contacts across the continent and has written four books on France as well as writing and broadcasting regularly on European affairs for French, German, Swiss, Belgian and US media as well as speaking at conferences.
Jonathan was appointed a CBE in 2000 for services to journalism and has also been made a Knight of both the French Legion of Honour and the French National Order of Merit. He is a member of the advisory boards of China Dialogue and the central bank organisation OMFIF. He is an associate at the London School of Economics (LSE) and London University's School of Oriental and African Studies (SOAS).
His 25 years’ experience covering the political economy of Russia and other FSU countries, including time working in Moscow-based investment banks where he was a top-ranked strategist and political analyst in broker surveys, started with a posting in Moscow as a UK diplomat in the early 1990s. In the decade from co-founding Trusted Sources until its merger with Lombard Street Research to form TS Lombard in 2016, he has also been producing broader political analysis on EMEA regional markets and geopolitics. Academic work in Italy during the 1980s underpins his lifelong interest in that country’s political economy. He is a regular commentator on FSU affairs in broadcast media and leading op-ed columns. He graduated from Oxford University, where he was also a Fellow of All Souls College.
Elizabeth joined TS Lombard in 2006 as the head of the Brazil research team . With over 25 years covering the country, she concentrates on political and economic policy, together with broad expertise in such key sectors as electric energy, infrastructure, agriculture and consumer-related issues. Elizabeth spearheads TS Lombard coverage of key investment themes including credit deepening, for-profit education as well as the complex relationship between Brazilian state-owned oil company Petrobras and the government.
Before joining TS Lombard, Elizabeth worked for publications including the Financial Times, Foreign Policy and Dow Jones. She has more than a decade of experience covering the Latin American private equity and venture capital industries and is considered a leading expert in this field. She also has broad knowledge of biofuels, sanitation and alternative energy. She has a PhD degree from Johns Hopkins University and a Master’s degree from the University of Texas – Austin, and has worked as a field producer for CNBC and National Geographic.
Marcus Chenevix joined TS Lombard full time in September 2016 having contributed as a freelance analyst since August 2015. He is a fluent Arabic speaker who has previously studied and worked in Oman and Egypt.
Marcus writes on Middle Eastern markets, focussing on the GCC and Turkey, he also writes on regional political issues for the Global Political Drivers service. He has previously worked for the United Nations Refugee Agency in Egypt and has a degree in Middle Eastern Studies from the University of Cambridge, where he specialised in the study of political Islam.
Amitabh joined TS Lombard in 2007 and is co-head of the India team focussing on politics and governance. He helps investors find investment opportunities in sectors such as infrastructure and mining and also analyses the investment impact of major government initiatives in areas such as biometric identification, financial inclusion and food security. His main themes are the limits on executive power, state capture and crony capitalism. He successfully anticipated the importance of the Modi government’s lack of upper house majority. Amitabh has previous experience as a political risk analyst and as a business journalist in India with Business Standard and Business India Television. He has many TV appearances on CNN, CNBC, Al Jazeera, NDTV and CNN-IBN and publishes in the Financial Times. He has degrees in economics and political science from Delhi University, the University of Chicago and Columbia University.
With more than 15 years of on-the-ground experience in Brazil and other Latin American countries, Grace has worked at TS Lombard since 2007 and specializes in economic and fiscal policy, political risk, energy and infrastructure as key research themes. She also has broad sector expertise in core areas spanning oil & gas, clean energy, agriculture and consumer demand. Prior to Trusted Sources, she worked as a journalist and published articles in The New York Times, The Wall Street Journal, The Asian Wall Street Journal, Barron's and Dow Jones Newswires among other publications. She is a graduate of Harvard University and has an MBA from Brazil’s Getulio Vargas Foundation.
Constantine Fraser has covered European politics, policy and political economy for TS Lombard since 2016. He was one of the very first analysts to call the importance of the Irish border question for the Brexit process, and predicted the decline in opposition to the single currency over 2016-2018. He has also worked closely on Italian populism, on Corbyn’s Labour party, on Macron’s reform programme and on the politics of the ECB. Before joining TS Lombard, Constantine was educated at the University of Oxford and the LSE, and worked in the global public affairs team at the communications firm Edelman. He speaks French, Italian and Modern Greek.
Madina was educated at the Urals State Technical University in Yekaterinburg, where she majored in economics and management (focused on mining and manufacturing). She moved to Moscow for graduate studies in finance at the Higher School of Economics, where, before joining TS Lombard, she went on to become a lecturer in financial management. Madina also has experience in the Investments and Strategic Development Department in a major listed Russian steel group and in business journalism for a regional television network in the Urals.
Eleanor joined TS Lombard in September 2018. She specialises in Chinese politics and political economy. Eleanor graduated from Cambridge University in 2017, with an academic award, and continued further study at National Taiwan University, learning Mandarin. Eleanor’s writing has previously been published in The Guardian and Japan Times, and she has done work experience at The BBC, The Economist, and Sky News.
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