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)

Politics Research

Politics
02 Aug 2019

Russia: Fiscal driver for rates

  • Orthodox policy is replenishing the fiscal buffer (‘NWF’) – this week to overflow point
  • With growth faltering, the government thinks of using the NWF as a stimulus
  • The CBR says – “stop: if you do that, we will tighten monetary policy”
  • Why so severe? Because a NWF-funded demand boost would eviscerate the fiscal rule
  • The CBR line will prevail here, but its victory won’t be fully evident until 2021
  • Meanwhile, expect easing to remain cautious: policy rate at least 250bp above core inflation
READ ME
Politics
26 Jul 2019

Global Political Drivers: Abe & Johnson - Trump pupils

  • The Japan-South Korea spat is a striking development
  • Politically motivated sanctions tend to matter for global asset allocation only when the sanctions are American
  • No longer: this form of global political risk is proliferating
  • The contagion is coming from Trump - both his policies and his style
  • Shinzo Abe and Boris Johnson are taking leaves from the Trump playbook
READ ME
Politics
17 Jul 2019

LatAm: Pemex's post-Urzua blues

  • One week after Finance Minister Urzúa's surprise exit, Pemex’s 2019-23 business plan continues to stoke growing investor concerns
  • The continuing triumph of AMLO's nationalistic energy team over the moderates suggests that ratings downgrades are on the way
  • The advance of controversial legislative bills for Pemex among other issues has also fed worries
  • As Q2 indicators continue to falter, fears of a technical recession are on the rise; but so too are rate cut hopes despite likely FX volatility
READ ME
Politics
15 Jul 2019

Brazil: Pension reform: The path ahead

  • Strong support for the pension reform in last week’s first floor vote in the Lower House points to a relatively smooth path ahead in the Senate
  • The Senate plans to present an alternative bill that will include state and municipal government employees in the reform
  • Despite the failure to complete the second vote on the pension reform in the Lower House, Banco Central is still likely to cut rates this month
  • Now that the pension reform hurdle has almost been cleared, the economy will be the main risk to monitor
READ ME

Track Record

Politics
30 May 2019

2019: China will allow RMB to break 7 vs USD

We said:

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. 

Outcome:

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. 

Politics
18 Jan 2019

2019: RBI will surprise with Feb rate cut

Consensus said:

RBI expected to keep rates on hold at their February meeting. 

We said:

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. 

Outcome:

RBI cut rates by 25bps in a move which shocked markets and analysts. 

Politics
29 Nov 2018

2018: On the road in India, BJP will lose state elections

Consensus said:

Opinion polls had shown the BJP leading in Madhya Pradesh and Chhattisgarh, but behind the Congress Party in Rajasthan. 

We said:

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. 

Outcome:

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. 

Politics
31 Oct 2018

2018: Costs of RBI-Government Spat

We said:

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. 

 

Outcome:

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. 

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 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. 

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 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. 

 

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. 

Our Team

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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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