Politics

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 Method

Our political analysts operate in ways that are proven to provide the best insights over time. 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.

Analysts may be embedded within the culture of the country they are reporting on, 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 practicality on 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.

Politics Research

Politics
17 Aug 2017

North Korea and markets: More of the same – with a twist

The twist to watch for is how “America First” plays out. A pre-emptive US strike on North Korea would entail no less of a US retreat – in fact a calamitous one – than the alternative of pursuing in practice , even while publicly rejecting, the option of M.A.D.-based deterrence.

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Politics
03 Aug 2017

India: Competition with China enters new phase

A confrontation between Chinese and Indian troops on the remote Doklam plateau has brought long simmering tensions to the surface. Below we examine the roots of this crisis, and its likely consequences.

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Politics
03 Aug 2017

Brazil: The cost of Temer’s victory

As expected, embattled President Michel Temer won an easy victory in the Lower House on the first criminal charge against him, with a decisive 263-227 vote on 2 August to shelve the investigation until after he leaves office. But more obstacles lie ahead.

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Politics
02 Aug 2017

China: Korea circle grows more vicious

  • Donald Trump’s approach to North Korea is widening the gap between the US and China
  • As the president becomes more isolated, choices narrow
  • Xi Jinping is playing a broader power game
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Track Record

Politics
10 Mar 2017

2017: Macron to win French Presidency, Le Pen’s chances overstated

Consensus said:

Markets pricing in chances of Le Pen victory, euro area spreads widening and talk about the future of the euro

We said:

The prospect of a victory for Marine Le Pen has unsettled markets. A case can certainly be made for how she could win. We believe that, for all her impact in moving French politics to the right, this is unwarranted. Despite his lack of backing by an established political party, his age (39) and his thin governmental experience, the centrist candidate, former banker Emmanuel Macron, has a much better chance than Le Pen of entering the Élysée Palace in May. The left has divided; and as Macron acquires ever more high-profile endorsements. At a recent press conference confirming his intention not to run, the centre-right primary candidate and former PM Alain Juppé seemed to be opening the door to eventually giving Macron his blessing. (Europe Watch 10 March 2017)

Outcome:

Macron beats Le Pen by 66% to 34% in the second round to become President. His En Marche! party subsequently wins a huge majority in the French parliament. 

Politics
03 Mar 2017

2017: Xi’s power consolidation allows room for lower growth target than previously promised

We said:

Xi Jinping promised in November 2015, that the economy would grow at 6.5% through to 2020. This was necessary, he said, to fulfill a promise by his predecessor, Hu Jintao, to double the 2010 GDP and per capita income by the end of the decade. However, over the past year, there have been several signs that Xi might be willing to back away from this pledge. After recent conversations in Beijing, we believe the target will be relaxed. We believe policymakers will accept growth below 6.5% from next year. The change responds to a wide-scale recognition that the current rapid pace of debt accumulation is unsustainable and increasingly risky. This bold political move will be enabled by Xi Jinping’s consolidation of power at the 19th Party Congress at the end of 2017. (China 03 March 2017)

Outcome:

Li Keqiang announced a lower growth target of “around 6.5%”, the lowest in 25 years, on 4th March 2017. 

Politics
26 Apr 2016

2016: Nabiullina is a Russian Volcker – equities and bonds will benefit

We said:

Success in squeezing persistently high inflation out of the system would be an historic achievement for the Central Bank under the leadership of Elvira Nabiullina and would have positive implications for Russian financial asset prices. Nabiullina’s improving chances of success are founded on her most important achievement to date, which is to have secured President Putin’s support for what she calls “moderately tight” monetary policy. The CBR does not enjoy statutory independence in its pursuit of an inflation target. It therefore depends on political support (as, arguably, is the case for its global peers, which are formally independent). President Putin has consistently provided such support since the previous crisis of 2008-09. In our view, his underlying motive came out of the lesson brought home by that crisis – namely, that monetary policy matters for sovereignty and self-reliance (paramount goals for Putin). In the run-up to 2008, Russia became prey to the well-known “impossible trilemma”, whereby a country with a convertible currency and pegged exchange rate must submit to having its domestic interest rate set by the outside world. Quite apart from the intrinsic desirability of regaining monetary sovereignty in Putin’s world view, an inflation-targeting framework makes it easier to weather periodic crises. That political support will continue for two reasons: first, the worst is over for real household income, and monetary policy is now helping rather than hindering this turnaround; second, Nabiullina is avoiding shock therapy, thanks in part to effective coordination with fiscal policy. (Russia 26 April 2016)

 

Outcome:

10y bond yields fall from 9.25 on 26th April to bottom at 7.48 in May 2017. RTS index rises from 951 on 29th April to peak at 1196 in January 2017.

Politics
11 Apr 2016

2016: No RMB devaluation, Beijing will use a ‘managed float’

Consensus said:

Large speculative positions for a repeat of the August 2015 RMB step devaluation. 

We said:

Although speculators were wrong to anticipate a sudden devaluation, they were not wrong in noticing that the RMB is overvalued. Despite slowing dollar demand from corporates and tight capital controls, net capital flows are still negative. The government has no desire to protect an overvalued currency because such an approach is expensive and hampers its ability to implement monetary policy. But at the same time it is keen to preserve stability. For this reason, we believe the authorities will continue to use a “managed float” approach, gradually guiding the currency down towards the market level but allowing occasional volatility to inflict pain on speculators. (China 11 April 2016)

Outcome:

USD/CNY weakened from 6.46 on date of publication to 6.96 on 3rd January 2017.

Politics
07 Oct 2015

2015: Xi Jinping takes control of economic policy as ‘core leader’

We said:

Xi’s concept of reform differs from the markets. We believe that Xi recognizes the need for economic modernization now that the 1980s model of cheap labour, cheap capital and strong export markets no longer applies. But he wants to regulate the process in keeping with the stress on control shown by the Communist Party since its foundation 90 years ago. Above all, he does not want to allow economic liberalization to spill over into China’s political structure and weaken the Party’s grip. This means that reform will be applied very cautiously and that political and social factors will play a big role in policy implementation. (China 07 October 2015)

Outcome:

Investors disappointed by reform progress. Shanghai Composite Index move sideways for 2 years. 

Politics
30 Jan 2015

2015: Levy honeymoon will soon be over for Brazilian assets, recession coming

Consensus said:

Markets up on confidence in new Finance Minister Joaquim Levy. 

We said:

We think his honeymoon with the markets will end soon for the following reasons:

  • President Rousseff has become a lame duck even before her second term has really started.
  • Levy has successfully harvested the low-hanging fruit of fiscal reform – namely, tax hikes that do not require Congressional action; but these actions fall short of what is required to reach his target of 1.2 per cent of GDP 2015 primary surplus.
  • The full impact of the fiscal “bombs” and other creative accounting measures from Dilma’s first term are still not quantified.
  • Extraordinary fiscal assistance will be required this year to prevent a precipitous collapse of infrastructure spending on existing projects and the Rio 2016 Olympics.
  • Although many analysts have downgraded their forecasts and are now calling for a small decline in GDP growth this year, we think the consensus is still too optimistic. We revise down our earlier -1 to 0 per cent GDP forecast to -1 to -2 per cent for 2015. (Brazil 30 January 2015)

Outcome:

BOVESPO rose from 46,908 to 57,479 on 30th April before falling back to 43,200 on 21st Dec 2015 when Levy left office. Equities finally bottomed out at 37,497 by 28th Jan 2016. Worst recession for 25 years in 2016-2017.

Our Team

POLITICS

Jonathan Fenby

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POLITICS

Christopher Granville

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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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Elizabeth Johnson

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Madina Khrustaleva

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Trey McArver

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ECONOMICS

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