2018: A Storm Brewing?
Low volatility in equity asset prices – for emerging and developed markets – and the relatively benign impact of political risk in 2017 on a range of asset classes was a major theme for most in the investment and business world. There is a cyclical nature to this as volatility moves in longer-term waves, punctuated by spikes and drops along the way.
In 2018, PRS is looking at higher lending rates in the US and later elsewhere. The end of quantitative easing has begun in the US, with the Fed saying it will reduce its balance sheet by about $450 billion by the end of the year. The European Central Bank has said it will continue buying paper until inflation picks up, although in November several influential board members were reported to be pushing for a less accommodative monetary regime.
Whether shrinking balance sheets of the central banks will take some of the air out of the markets is not entirely clear: there’s considerable evidence pointing to tightening cycles coinciding with lower equity prices and often recessions. Yet there is talk that strong corporate earnings, especially in the US, may be sufficient to weather the receding stimulus, buttressed by lower taxes and a less burdensome regulatory climate. Moreover, the new Fed Chair, Jerome Powell, is widely seen as less hawkish than others that were being considered for the job, and well-respected by most of the market.
Turning to our composite scores for December, some country risk movements are notable. Over the past year, much of the Middle East has become less risk, with Libya, Egypt, and Saudi Arabia being some of the more significant improvements. No one region became riskier, however, but countries such as Germany, Costa Rica, Cuba, and Tanzania have seen their risk profiles deteriorate. Our Country Reports provide all the details for these movements, fueled by our quant-based models.
As our longstanding clients know, our ‘risk’ portfolios have returned 20%+ over the years – something that was initially uncovered by Dr Campbell Harvey and others (currently the J. Paul Sticht Professor of International Business at Duke University’s Fuqua School of Business) some two decades ago and detailed in Barron’s. As such, our risk metrics and accompanying data are used by the world’s leading institutional investors, central banks, hedge funds, and research scientists.
Our data continues to be back-tested for relevance on this score; and, in response to high demand, in 2018 PRS will be unveiling the Political Risk Investor. This unique publication, available monthly, will bring a host of unique investment insights and actions, based on PRS’ proprietary risk forecasts, ratings, and data. In addition, these items will have the benefit of additional insights generated by various applications of artificial intelligence and machine learning through PRS’ partnership with Queen’s University and the Center for Computer Analytics.
PRS’ new Anti-Corruption and Investment Climate group is gearing up, and begins working with new clients from a range of Asian anti-graft organizations in Asia. We have recently met with officials from Kazakhstan and welcome into the PRS family Taiwan. In April, I am looking forward to being one of the keynote speakers at NAZAHA’s (Saudi Arabia’s anti-corruption agency) third annual international conference on protecting integrity and combatting corruption in privatization under the patronage of King Salman.
Also significant is that, beginning in January, PRS will be producing what we have tentatively called “ICRG-Plus” – a ten country data series (covering all ICRG tables) for the following emerging, frontier, and offshore markets: Macao (China), Cambodia, Uzbekistan, Laos, Turkmenistan, Tajikistan, Kyrgyzstan, the Cayman Islands, the British Virgin Islands, and the Marshall Islands. Most of these increasingly important investment destinations are not covered by others – and clearly do not benefit from our proprietary, quant-driven models! Be sure to contact the NY office at (315) 431-0511 for full details and pricing.
As always, our data features prominently in the work of the IMF. In a November Working Paper, the Fund asked whether the easing in cross-border bank lending (post financial crisis of 2008) was evidence of a retreat in financial globalization? Using, in part, PRS’ composite scores, the IMF provides a more nuanced consideration, highlighting increasing regionalization of lending flows, among other items. https://lnkd.in/duV4kUz
Similarly, in December, the Fund utilized a host of our political risk metrics as a proxy for overall ‘governance’ in producing Guinea Bissau’s latest Article IV Consultation and 4th review under the country’s Extended Credit Facility Arrangement (ECFA). As the Fund noted, Guinea Bissau’s ‘growth has been supported by a calm security situation and favorable terms of trade developments. [But] political tensions resulted in multiple changes of government during 2015–16 and Parliament has not been sitting since late 2015.”(https://lnkd.in/dEBjQ_F)
Finally, clients of ICRG should note that some 52 countries had their political risk profiles adjusted this month, affecting 64 individual risk metrics.