Political risk outlook investment pack - April 2014


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The political risk outlook investment pack examines political risk trends & events for the month ahead and discusses the implications for market. This summary pack is made available one-week after the release of the full pack for subscribers.

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Political risk outlook investment pack - April 2014

  1. 1. www.politicalmonitor.com.au! Poli%cal  risk  outlook  –  investment  pack     April  2014  
  2. 2. OUTLINE! This presentation provides a summary of Political Monitor’s monthly Political risk outlook – investment pack. It includes Political Monitor’s proprietary risk scores and indices and domestic, regional and global analysis of the commercial implications of political trends and events. The full pack is released to subscribers at the beginning of each month.! ! To find out more about subscribing to the full monthly pack please contact:! ! Damian Karmelich ! ! ! ! ! ! !Steve Cusworth! Partner – Sydney ! ! ! ! ! ! !Partner - Melbourne! p. 0407 772 548 ! ! ! ! ! ! !p. 0417 178 697! e. karmelichd@politicalmonitor.com.au ! ! !e. cusworths@politicalmonitor.com.au !
  3. 3. CONTENTS! •  Australian Political Risk Outlook …………………………………………………………… p. 4! •  Asia Political Risk Outlook ………………………………………………………………….. p. 8! •  Food prices add to social tensions …… ……..….………..… ……...….……... p. 9! •  Elections in key markets …………...…………..…………………..…….……… p. 11! •  Global issues ………………………………..………………………….….……………...…. p. 13! •  Latest reports ……………………………………………………….……………...………… p. 18! •  Appendix 1 – Australian Political Risk Index methodology…….……………...…………. p. 21! •  Appendix 2 - Economic & investment impact of political and social instability ……….. p. 22! ! ! ! ! !! Political risk outlook! 3!
  5. 5. AUSTRALIAN POLITICAL RISK INDEX – political uncertainty hit a 6 month high in March! Political risk outlook! 5! •  Events  in  Crimea  and  the  Abbo:  Government’s   failure  to  repeal  the  carbon  and  mining  taxes   pushed  the  index  to  its  highest  level  in  6   months.  While  uncertainty  eased  in  the  la:er   half  of  March  the  index  remained  vola%le.   •  While  the  Government’s  failure  to  repeal  the   two  taxes  was  expected  it  did  focus  investor   minds  on  the  reality  that  a  double-­‐dissolu%on   elec%on  in  the  second  half  of  the  year  is  a  real   possibility.       •  The  outcome  of  the  Senate  elec%on  re-­‐run  in   Western  Australia  will  provide  cri%cal  insight   into  the  likelihood  of  a  new  Senate  in  July   repealing  the  taxes  or  pushing  the  country   toward  an  early  poll.  Any  elec%on  outcome   other  than  a  strong  showing  by  the  Government   will  increase  uncertainty  about  the  path   forward.   •  Ongoing  tensions  in  Ukraine  are  likely  to  keep   investors  on  edge  as  the  crisis  begins  to  impact   prices  for  natural  gas,  gasoline  and  wheat   futures.     0   2   4   6   8   10   12   14   16   18   Poli%cal  Uncertainty  Score   Poli%cal  Risk  Index  
  6. 6. AUSTRALIAN POLITICAL RISK INDEX & ASX200 – political & policy uncertainty continues to weigh on key indices! Political risk outlook! 6! 4800   4900   5000   5100   5200   5300   5400   5500   0   2   4   6   8   10   12   14   16   18   ASX  200   Poli%cal  Uncertainty  Score   Poli%cal  Risk  Index  vs.  ASX  200   PRI   ASX  200  
  7. 7. STATE GOVERNMENT RISK INDEX – state governments present elevated risk for investors! Political risk outlook! 7! •  There  is  elevated  risk  across  a  number  of  states,   influenced  by  recent  elec%ons,  minority   government  and  con%nuing  budget  challenges.   However,  the  trend  is  improving  in  all  states   except  Victoria.   •  New  South  Wales  edges  out  Western  Australia   as  the  state  with  the  lowest  level  of  poli%cal  risk   due  to  an  improving  budget  posi%on,  a  stable   Cabinet  and  a  large  parliamentary  majority.     •  The  ongoing  instability  of  the  minority  Victorian   Government  is  an  obvious  factor  in  its  elevated   risk  levels  and  despite  leading  the  index  with  the   lowest  rela%ve  budget  risk,  Victoria  has  the   second  highest  overall  risk  score.   •  The  outcome  of  the  South  Australian  elec%on   exposes  the  state  to  an  extended  period  of   elevated  risk  with  minority  government  and   budget  challenges  producing  significant   headwinds.   0   10   20   30   40   50   60   70   80   90   100   Total  Risk  Score     Budget  Risk     Policy  Risk   Stability  Risk   Reputa%onal  Risk   State  Poli%cal  Risk  Index  March  2014   NSW   Vic   Qld   WA   SA   Tas  
  9. 9. ASIA  POLITICAL  RISK  INDEX  –  rising  food  prices  are  adding   to  tensions  already  evident  across  the  region   Political risk outlook! 9! 80   100   120   140   160   180   200   220   240   260   2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011  2012   Consumer  prices  –  Food  indices   (Food  &  Agriculture  Organisa%on,  United  Na%ons)   World   Asia   South  Eastern  Asia   East  Asia   •  Household  budgets  across  Asia  are  coming  under   increasing  pressure  with  global  food  prices   experiencing  their  largest  increase  since   mid-­‐2012.       •  The  United  Na2ons  Food  and  Agriculture   Organiza2on’s  monthly  food-­‐price  index  rose  5.2   points  in  February  as  drought  in  a  number  of   countries  pushed  up  the  price  of  soe   commodi%es  such  as  wheat  and  beef.       •  Emerging  markets  generally  suffer  more  from   rising  food  prices  as  a  larger  propor%on  of   household  budgets  are  commi:ed  to  foodstuffs.     •  Rising  food  prices  were  a  cri%cal  factor  in  the   Arab  spring  uprisings,  which  brought  thousands   of  residents  to  the  streets  angry  at  the  failure  of   largely  corrupt  governments  to  respond  quickly   to  the  stress  many  households  were  feeling.      
  10. 10. ASIA  POLITICAL  RISK  INDEX  –  price  rises  are  greatest  in   countries  already  rated  a  VERY  HIGH  risk  on  the  Asia   Poli2cal  Risk  Index   Political risk outlook! 10! Indonesia  –  rising  prices  are  increasing  the   pressure  on  household  budgets  in  a  country   where  nearly  45%  of  income  is  dedicated  to   foodstuffs  and  food  security  is  compara%vely   low.  Food  and  fuel  prices  will  be  core  issues  in   forthcoming  parliamentary  &  presiden%al   elec%ons.     China  –  with  around  one  third  of  household   budgets  dedicated  to  foodstuffs  rising  prices  are   always  a  cause  for  concern  for  the  Government   as  they  keep  a  close  eye  on  community  disquiet   about  extravagance  among  the  country’s  elite.     Thailand  –  while  rated  a  rela%vely  low  risk  the   validity  of  Thailand’s  rice  subsidy  program  and   rising  food  prices  are  combining  to  increase  the   pressure  on  Prime  Minister  Yingluck  Shinawatra.   0   50   100   150   200   250   300   350   2000  2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011  2012  2013   Consumer  prices  –  Food  indices   (Food  &  Agriculture  Organisa%on,  United  Na%ons)   China   Indonesia   Malaysia   Philippines   Thailand   Vietnam  
  11. 11. ELECTIONS  IN  KEY  MARKETS   INDONESIA:  HIGH  RISK   •  Jakarta  Governor  Joko  Widodo  has  emerged  as  firm   favourite  for  the  presidency.  However,  Indonesia’s   geographic,  ethnic  and  religious  diversity  means  he   will  likely  rely  on  a  parliamentary  coali%on  to  govern   making  it  harder  to  push  through  economic  reform.   •  With  youth  unemployment  approaching  30%  in  a   country  where  over  25%  of  the  popula%on  is  under   the  age  of  30  there  remains  considerable  scope  for   social  discontent.  This  is  fer%le  ground  for  religious   extremists  in  par%cular.   •  Rising  prices  are  also  a  cause  for  social  disquiet  with   the  price  of  Brent  crude  rising  over  20%  in  local   currency  terms  pumng  pressure  on  fuel  prices.  This   has  been  further  exacerbated  by  an  end  to   government  fuel  subsidies.   •  The  elec%on  has  coincided  with  a  rise  in  economic   na%onalism  that  may  con%nue  aeer  the  parliamentary   and  presiden%al  elec%ons,  par%cularly  if  Widodo  feels   such  policies  are  necessary  to  build  an  effec%ve   parliamentary  majority.   Political risk outlook! 11! 0   5   10   15   20   25   30   Percentage  increase  in  ICE  Brent  crude     (local  currency)   1  July  2013  -­‐  24  February  2014   %  increase  in  local  currency   %  ICE  Brent  Crude  Increase   9000   9500   10000   10500   11000   11500   12000   12500   1/04/2013   1/05/2013   1/06/2013   1/07/2013   1/08/2013   1/09/2013   1/10/2013   1/11/2013   1/12/2013   1/01/2014   1/02/2014   1/03/2014   1/04/2014   USD  :  Indonesian  Rupiah  
  12. 12. ELECTIONS  IN  KEY  MARKETS  –     INDIA:  HIGH  RISK   •  The  outlook  for  the  Indian  elec%on  is  uncertain.   While  the  BJP  are  polling  strongly  local  state  based   par%es  are  also  faring  well  and  are  likely  to  influence   the  make-­‐up  of  any  eventual  government.   •  Key  themes  remain  corrup%on,  employment  and   investment.  However,  the  level  of  government   support  for  farmers  also  remains  a  central  issue  and   this  introduces  a  major  impediment  to  significant   structural  reform.   •  The  risk  of  social  discord  is  ever  present  with  around   30%  of  the  popula%on  living  below  the  poverty  line   and  tens  of  millions  of  young  people  unemployed.   •  Food  prices  are  also  a  concern  with  around  35%  of   household  budgets  dedicated  to  foodstuffs.   •  While  investors  are  hopeful  of  a  new  government   that  will  pursue  reform  they  should  be  mindful  of   the  likely  challenges  for  either  of  the  major  par%es   in  building  a  governing  coali%on  and  the  implica%ons   for  reform  in  the  second  half  of  2014.   Political risk outlook! 12! 50   52   54   56   58   60   62   64   66   68   70   USD  :  Indian  rupee  
  13. 13. GLOBAL  ISSUES  
  14. 14. CRISIS  IN  THE  UKRAINE  –  MARKETS  STARTING  TO  PAY   ATTENTION   •  Events  in  Ukraine  are  beginning  to  have  ramifica%ons   beyond  Eastern  Europe  with  prices  for  hard  and  soe   commodi%es  rising  off  the  the  back  of  growing   uncertainty.   •  Natural  gas  prices  have  been  vola%le  rising  as  much  as   6%  in  Q1  2014  before  easing  at  the  end  of  the  quarter   while  gasoline  prices  increased  over  8%  during  the   same  period.  Wheat  futures  rose  over  16.5%  in  a   poten%al  boon  for  Australian  farmers.  Russia  &   Ukraine  combined  contribute  around  17%  of  global   wheat  exports.   •  Tensions  are  likely  to  remain  vola%le  in  the  region  with   Russia  set  to  con%nue  meddling  in  the  east  of  Ukraine   to  disrupt  efforts  by  Kiev  to  form  a  strong  central   government.     •  Sanc%ons  are  unlikely  to  dissuade  Vladimir  Pu%n  from   further  ac%on.  He  is  well  aware  of  Europe’s   dependence  on  Russia  for  energy  and  an  end  to  the     US$200bn  –  US$300bn  in  gas  subsidies  to  Ukraine  will   more  than  offset  the  cost  of  sanc%ons.! ! ! ! !! ! Political risk outlook! 14! 550   600   650   700   750   2/01/2014   2/02/2014   2/03/2014   CBOT  Wheat  Futures   3.5   4   4.5   5   5.5   6   6.5   2/01/2014   2/02/2014   2/03/2014   NYMEX  Natural  Gas  Futures  
  15. 15. THE  FUTURE  OF  THE  EU  –  ELECTIONS  APPROACH   •  EU  elec%ons  in  May  will  determine  the  extent  to   which  Europe’s  leader  can  push  on  with  a  program  of   deeper  integra%on  including  a  banking  union  &   public  debt  guarantees.   •  A  coali%on  of  right-­‐wing  par%es  across  the  con%nent   are  campaigning  on  a  promise  to  join  forces  in   Brussels  and  wind  back  the  European  project.  The   popularity  of  these  par%es  rest  on  sluggish  growth  in   countries  like  France,  concerns  about  migra%on   within  the  EU  &  hos%lity  to  austerity.   •  The  early  signs  are  good  for  this  coali%on:  the  Front-­‐ Na%onal  (FN)  in  France  gained  control  of  11  local   councils  in  recent  elec%ons  (up  from  its  record  high   of  4);  Freedom  Party  of  Austria  won  over  20%  of  the   vote  in  2013  elec%ons;  Swiss  People’s  Party  won  26%   of  the  vote  in  2011;  and  polls  show  strong  support   for  the  UK  Independence  Party.   ! ! Political risk outlook! 15! 0   50   100   150   200   250   1/01/08   1/05/08   1/09/08   1/01/09   1/05/09   1/09/09   1/01/10   1/05/10   1/09/10   1/01/11   1/05/11   1/09/11   1/01/12   1/05/12   1/09/12   1/01/13   1/05/13   1/09/13   Economic  Policy  Uncertainty  Index  -­‐  Europe   2   2.5   3   3.5   4   4.5   5   French  share  of  global  GDP  based  on  PPP,  %  
  16. 16. THE  FUTURE  OF  THE  EU  –  UNEMPLOYMENT  A  KEY   DRIVER  OF  SUPPORT  FOR  RIGHT  WING  PARTIES   Political risk outlook! 16! European  unemployment  rates  –  Feb  2014  (seasonally  adjusted)  
  17. 17. THE  FUTURE  OF  THE  EU  –  ELEVATED  LEVELS  OF  YOUTH   UNEMPLOYMENT  UNDERPIN  ANTI-­‐EU  SUPPORT     Political risk outlook! 17! 8.0   10.0   12.0   14.0   16.0   18.0   20.0   22.0   24.0   26.0   2011Q3   2011Q4   2012Q1   2012Q2   2012Q3   2012Q4   2013Q1   2013Q2   2013Q3   2013Q4   EU  unemployment  -­‐  total  pop.  versus  youth   Unemployment  -­‐  total  popula%on  (%)   Unemployment  -­‐  youth  (%)  
  18. 18. LATEST  REPORTS   ! ! !Australian  PoliEcal  Risk  Index        Weekly  updates  on  our  proprietary  index  tracking  poli%cal  and  policy          uncertainty  in  Australia.          State  Government  Risk  Index        Which Australian states present the greatest risk and offer the biggest ! ! ! !opportunity for investors? Our State Government Risk Index provides a ! ! !comparative analysis.!        PoliEcal  risk,  ESG  &  markeEng  performance        Poli%cal  Monitor  examines  the  latest  data  on  the  link  between  ESG  and          market  performance. ! ! !! Political risk outlook! 18!
  19. 19. Detailed analysis on these and other political risks confronting investors can be found at www.politicalmonitor.com.au! ! To find out more contact:! ! Damian  Karmelich              Steve  Cusworth   Partner  -­‐  Sydney                Partner  -­‐  Melbourne   p.  0407  772  548                p.  0417  178  697   e.  karmelichd@poli%calmonitor.com,au      e.  cusworths@poli%calmonitor.com.au! ! About Political Monitor! Political Monitor is a political risk research and advisory firm. Our analysis provides insight into the implications of political risk for commercial valuations, asset selection, investment decisions, strategic planning and operational decisions. ! ! Political risk outlook! 19!
  20. 20. DISCLAIMER & COPYRIGHT! Disclaimer ! Information in this document is subject to change without notice and does not represent a commitment on the part of Seller.! Seller does not warrant the accuracy, completeness or timeliness of any of the data and/or programs (“Information”) available within the report. The Information is provided “as is” without warranty of any kind, express or implied, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, title or non-infringement.! In no event will Seller or its affiliates be liable to any party for any direct, indirect, special, consequential or other damages for any use of or reliance upon the Information found within the report, or on any other reference documentation, including, without limitation, lost profits, business interruption, loss of programs or other data, even if Seller is expressly advised of the possibility of such damages.! The disclaimer is in addition to the specific terms and conditions that apply to the products or services offered by Seller.! Copyright! Copyright © Political Monitor Pty Ltd 2014. This document is copyright and contains confidential information that is the property of Seller. Except for the purposes of executing or applying this report, no part of this document may be copied, stored in a retrieval system or divulged to any other party without written permission. Such rights are reserved in all media.! Intellectual property rights associated with the methodology applied in arriving at this document, including templates and models contained there in, reside with Political Monitor Pty Ltd, excepting client information it contains that is demonstrably proprietary to the client or covered by an agreement or contract defining it as such.! No part of this report may be reproduced, transmitted, stored in a retrieval system, or translated into any language in any form by any means, without the written permission of Political Monitor Pty Ltd.! © Political Monitor Pty Ltd 2014. All Rights Reserved . ACN 166 162 572.! Political risk outlook! 20!
  21. 21. APPENDIX  1  -­‐  AUSTRALIAN  POLITICAL  RISK  INDEX   METHODOLOGY   The  Poli%cal  Monitor  Australian  Poli2cal  Risk  Index  is  a  dynamic  index  that  tracks  the   level  of  policy  uncertainty  in  Australia  relying  on  a  number  of  variables  including   market  vola%lity  and  the  dispersion  of  private  sector  economic  forecasts.  The  index  is   refreshed  daily  providing  an  up  to  date  gauge  of  poli%cal  and  policy  uncertainty.   ! ! ! ! ! Political risk outlook! 21!
  22. 22. APPENDIX  2  -­‐  ECONOMIC  &  INVESTMENT  IMPACT  OF   POLITICAL  &  SOCIAL  INSTABILITY  –  DOES  IT  MATTER?   •  Poli%cal  risk  is  the  second  ranked  concern  for  publicly  traded  companies  …  "Looking  ahead,  investors   con%nue  to  be  wary  about  the  effects  of  systemic  risk,  poli%cs  and  regula%on  on  the  world's  markets  and   how  they'll  perform.”  (BNY  Mellon,  Global  Trends  in  Investor  Rela2ons,  2014).   •  In  general  poli%cal  instability  results  in:     •  (a)  lower  economic  growth  (Aisen  &  Veiga,  2013)   •  (b)  reduced  private  sector  investment  (Alesina  &  PeroQ)   •  (c)  increased  infla%on  levels  &  vola%lity  (Aisen  &  Veiga,  2008).   •  The  economic  effects  of  poli%cal  &  social  instability  remain  for  an  observable  period  of  2  –  3  years.  The  key   determinant  of  whether  the  effect  of  instability  ceases  at  that  point  is  the  speed  with  which  countries   implement  reforms  &  improve  governance  (Bernal-­‐Verdugo,  Furceri  &  Guillaume,  IMF  Working  Paper,   2013).   •  An  increase  in  economic  policy  uncertainty  foreshadows  a  decline  in  economic  growth  and  employment  in   the  following  months  (Baker,  Bloom  &  Davis,  EPU).   •  The  Interna%onal  Monetary  Fund  (IMF)  es%mates  the  economic  loss  to  Libya,  Egypt,  Tunisia,  Syria,  Yemen,   and  Bahrain  in  2011  at  USD$20.56  billion  as  a  result  of  poli%cal  and  social  conflict.     ! ! ! ! !! Political risk outlook! 22!