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)
In-depth big picture analysis of global macro economic issues driving growth and asset prices. (12 per year)
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 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.
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 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.
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.
Morena’s party alliance is unlikely to reach absolute majority in Congress
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
Morena’s party alliance obtained a landslide win for the presidency and achieved an absolute majority in Congress in 1 July’s election
A NAFTA deal is possible in May
The possibility of closing negotiations with a ‘skinny’ deal is a good sign for the ongoing trade talks, but the proposal is not credible
A NAFTA deal was not reached in May and the negotiation process paused for 2 months
Geopolitical risk premium for Russia is soaring, with no end in sight.
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.
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.
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'.
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.
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.
Chairman, China team and Managing Director, European Political Research
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).
Managing Director, EMEA and Global Political Research
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.
Managing Director, Brazil Research
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.
Political Analyst, India Research
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.
Senior Director, Latam Research
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.
Analyst, European Research
Constantine Fraser is an Analyst in our European Political Research team, with particular interests in French and Italian national politics and in European integration. He previously worked in the Global Public Affairs team at the communications firm Edelman. He speaks fluent French and advanced Italian and Modern Greek, and has written for UK and foreign media. He graduated from the University of Oxford with a degree in Philosophy and Modern Languages and a university prize, and has an MSc in Political Theory from the LSE.
Analyst, Russia & FSU Research
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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