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
11 Jan 2019

Global Political Drivers: European fight club

  • The Eurozone has turned twenty but far from grown up
  • The Italy-Germany combo ensures chronic crises, now with political fuel
  • That fuel will be distilled by this year’s European parliament election
  • The politics will allow ECB to supply palliatives – but not fundamental cures
  • Such resolution will only follow games of chicken, causing intense market turbulence
READ ME
Politics
11 Jan 2019

LatAm: Mexico: New year, new fuel crisis

  • The fuel distribution shortage in Mexico’s central region and the capital continues to worsen as traders and local businesses warn of growing potential shocks
  • Pemex is belatedly working to normalize supplies, but if the crisis drags into next week, the economy will likely take a real hit
  • As consumer confidence has soared to a 12-year high, the Finance Ministry this week unveiled more market-friendly initiatives in the hopes of reviving business confidence
READ ME
Politics
11 Jan 2019

China Watch: Trade war fallout: Deflation amid emergence of Asia trading bloc

  • China’s US exports to fall markedly in Q1/19
  • Deflationary pressures building in China’s domestic economy
  • Emergence of Asia trading bloc is getting underway
READ ME
Politics
11 Jan 2019

Brazil: Pension reform takes shape

  • Growing popular support for reforming the pension system will aid approval of the reform
  • Economy Minister Guedes appears to be winning the battle for a more ambitious pension reform, but Bolsonaro will have the final word
  • Another good sign for reform is growing support for the re-election of Lower House Speaker Maia, but the Senate presidency remains a risk
  • A further risk is posed by Bolsonaro’s top political coordinators, who do not support a robust reform
READ ME

Track Record

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. 

Politics
25 Jun 2018

2018: Mexico - AMLO will win presidency and Congress

Consensus said:

Morena’s party alliance is unlikely to reach absolute majority in Congress

We said:

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

Outcome:

Morena’s party alliance obtained a landslide win for the presidency and achieved an absolute majority in Congress in 1 July’s election

Politics
21 Jun 2018

2018: Modi welfare tilt now damaging state as well as national finances

We said:

Modi's policies have had a crucial bearing on the fiscal stance of the states. Welfarism is bloating state budgets. Our analysis shows that the quality of the spending mix is deteriorating at both the country and state government levels. More money is going on salaries, interest costs and other non-productive spending.

The recent fiscal target misses as well as Modi's increased tilt towards welfare spending imply a pause - if not reversal - in the fiscal consolidation efforts of the first few years of his government. With political headwinds rising ahead of national elections in 2019, it appears likely that both central and state governments will miss their FY19 targets. 

Outcome:

Since we published this warning further fiscal deterioration has occurred. More states have announced farm loan waivers, the central government (as well as some states) cut the excise duty on fuel products, and the central government has already exceeded its fiscal deficit target. Given that tax revenues are below target and the government has so far only achieved half of its disinvestment target, a slippage in its full FY target is highly likely. 

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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ECONOMICS

Through our analysis of the forces that drive economics at the global, regional and country level, we have a joined-up picture of the world economy and a deeper understanding of the countries that investors care about. This gives us a unique perspective that allows us to present courageous, fresh, long-term thinking and forecasting with high conviction.

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