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.
Analysis of key economic and policy drivers and what they mean for China related markets. (One note per week)
Flagship overview essay of EMs, relative asset allocation views for each asset class; our high-conviction total return views, heat map presentations of our FX and fixed income market views, as well as an accessible one-page summary for each of the 10 EM countries we cover. (First week of each month)
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)
Regional coverage with emphasis on Mexico. Economists and strategists travelling to each region, supported by local sources. (1 note 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)
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)
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)
Regional coverage supported by local sources with emphasis on Philippines, Indonesia, Thailand, Malaysia. (1 note per month)
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Hopes that Modi will usher in structural reforms has led to a strong rally across Indian asset classes. This short-term rally will likely fade as investors return focus to economic fundamentals and earnings.
Modi will stick to his winning policy mix of welfarism with limited, gradual reforms. After the initial euphoria, investor attention will switch to worrying economic fundamentals. GDP growth has slowed to its weakest pace in 5 years and global headwinds are rising. Falling consumption and slow investment imply that 7%-plus GDP growth will be a challenge. A more accommodating RBI leadership will continue to ease policy rates and banking norms. Creating jobs, improving rural incomes and reviving credit growth will be Modi's key priorities. Structural reforms in land and labour markets, and privatization of banks are unlikely.
That scenario has played out exactly and India is now in the midst of an investment and consumption slowdown. The RBI has continued to ease monetary policy, with anuncharacteristically large 35 bps cut in August. A fiscal stimulus package is also planned. Sensex fell 6% from 39,615 on 6 June to 36,976 on 6 August 2019.
Markets had fully priced one 25bp rate cut, with an additional 25bp cut only partially priced in.
Benign inflation and a stable ruble favour local debt, upcoming rate cuts should drive bond yields lower. The relatively high oil price should continue to boost investor sentiment while the system of FX interventions under the fiscal rule reduce the volatility of the ruble. Headline inflation has stabilised in recent months and core inflation trends remain downward. Breakeven inflation has fallen further over the past month. We expect the CBR to deliver two 25bp rate cuts before the end of the year underpinning our favourable view of local debt.
CBR cut rates by 25bp on 14 June, 26 July and 6 September. We closed the trade on 23 September for a gain of 9%. 7% of the return was generated from the 85bp fall in yield, with a 2% contribution from the currency.
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 its 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 a mass sell-off in global risk assets.
The government's latest moves to aid Pemex have given the struggling firm fresh fiscal relief, but fall far short of mitigating risks for its new USD8+ bn refinery.
More tax cuts for Pemex are forthcoming but a federal rainy day fund will no longer be tapped. This is positive for Pemex bondholders, but the firm's structural woes are unlikely to go away without a big change in energy policy; as fiscal risk migrates from the firm to the government, this will buy Pemex time but also boost the odds of sovereign ratings downgrades.
On June 5, Fitch downgraded Mexico's sovereign rating by one notch to BBB, and as a result, downgraded Pemex by one notch to junk the following day. On June 6, Moody's - which rates Pemex one notch above junk - changed its credit outlook to negative.
Lower House Speaker Maia is the key political supporter of the reform, but he will seek to show his independence from the administration. For his part, Economy Minister Guedes has shown his willingness to offer financial assistance to states in exchange for their support for reform.
Guedes and Maia are on the same page, which bodes well for the reform. Despite the lack of a clear message from President Bolsonaro himself, the good news is that the Speaker of the Lower House and the Senate President see pension reform as the top priority. Although the path ahead will be challenging, the strategy of turning the reform into a national issue, which involves state and municipal governments, will play an important role it getting it passed. Maia's political skills - and longer-term ambitions - make him the ideal partner for Guedes and the economic team to build support for the reform.
The economic team also appears to be willing to eliminate some elements of the reform to keep it focussed. We believe this is positive and will help speed up the approval process.
While Maia and Guedes have expressed their support for an ambitious reform, Bolsonaro needs to be on board too. If he expresses his willingness to use his political capital to push for an ambitious reform, his current popularity, combined with the rising understanding among the population about the need for reform, will set the stage for its approval this year.
The political progress of the reform bill was smoother than many had expected. Pension reform passed the Lower House in July 2019.
Investors are turning cautiously optimistic on China’s growth outlook amid the latest easing measures in January. There is still little awareness about the rising deflation risk.
It was quite a surprise to discover that only a handful of investors were aware of the rising deflation risk in China. In the past 10 years, PPI has been a reliable gauge of the economic cycle. As falling producer prices drive down industrial utilization, profit growth will slow as China enters a new cycle of corporate revenue growth. Lower PPI also means lower nominal GDP growth. In our view, market concern about corporate debt repayment will resurface when nominal GDP growth falls below 8% and more corporate debt defaults will start to accumulate when that indicator falls below 7%. This is because 7% nominal corporate revenue growth will not be enough to cover nominal interest rate payment so that outstanding corporate debt can be rolled over. We expect nominal GDP growth to rapidly decelerate to ~8% owing to PPI deflation in H1/19. In addition, domestic PPI deflation led by both primary goods and final manufactured goods could lead to the mainland exporting deflation to the rest of the world. Overall, we think investors have not paid enough attention to the emerging deflationary pressure in China.
Chinese nominal growth fell below 8%, to 7.8%, in Q1. PPI turned negative in the July data.
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.
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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