Political risk outlook investment pack - August 2014
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Political risk outlook investment pack - August 2014

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The Political Monitor August political risk outlook investment pack includes the Australian Political Risk Index, political risk spreads, country risk analysis for China, India and Indonesia, an ...

The Political Monitor August political risk outlook investment pack includes the Australian Political Risk Index, political risk spreads, country risk analysis for China, India and Indonesia, an examination of geo-political events on oil prices and a review of political risk across Africa.

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Political risk outlook investment pack - August 2014 Political risk outlook investment pack - August 2014 Presentation Transcript

  • www.politicalmonitor.com.au! Poli%cal  risk  outlook  –  investment  pack     August  2014  
  • 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 and this summary version is released for general distribution a minimum of one week later.! 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 !
  • CONTENTS! •  Australian Political Risk Outlook …………………………………………………………… p. 4! •  Asia Political Risk Outlook ………………………………………………………………….. p. 7! •  Country in focus: China …..……….…… ……..….………..… ……...….……... p. 8! •  Country in focus: India ……………………………………………………………. p. 9! •  Country in focus: Indonesia …………….…… ……..….………..… …………... p. 10! •  Global issues ………………………………..………………………….….……………..….. p. 11! •  Appendix 1 – Australian Political Risk Index methodology…….……………...……..….. p. 17! •  Appendix 2 – Political risk spread methodology ……………………………………..…… p. 18! •  Appendix 2 - Economic & investment impact of political and social instability ……..… p. 19! ! ! ! ! !! ! Political risk outlook! 3!
  • AUSTRALIAN  POLITICAL  RISK  OUTLOOK  
  • AUSTRALIAN POLITICAL RISK INDEX – domestic & global events pushed the index to its second highest level in 10 months! Political risk outlook! 5! 0   2   4   6   8   10   12   14   16   18   Poli%cal  Uncertainty  Score   Poli%cal  Risk  Index  
  • AUSTRALIAN POLITICAL RISK INDEX – domestic & global events pushed the index to its second highest level in 10 months! Political risk outlook! 6! •  Debate  over  the  carbon  tax  and  uncertainty  about  the  detail  of  the  AbboF  Government’s  ‘Direct  Ac%on’   policy  helped  push  the  poli%cal  risk  index  to  its  second  highest  level  in  10  months.   •  Adding  to  the  high  level  of  uncertainty  and  underlying  vola%lity  were  the  failure  of  the  Government  to   garner  support  for  key  components  of  its  budget  and  the  growing  realisa%on  by  markets  that  Clive   Palmer  and  his  Palmer  United  Party  (PUP)  were  increasingly  willing  to  use  their  balance  of  power  in  the   Senate  to  frustrate  government  legisla%on  in  pursuit  of  their  own  objec%ves.  Whether  by  design  or  lack   of  experience  the  new  Senators  have  created  a  sense  of  confusion  around  the  future  of  key  pieces  of   government  legisla%on.     •  Geo-­‐poli%cal  events  also  weighed  on  the  index  with  uncertainty  growing  about  the  long-­‐term   implica%ons  of  Western  sanc%ons  against  Russia,  the  impact  of  the  ongoing  turmoil  in  Ukraine  on  global   energy  supplies  and  prices,  and  events  in  the  Middle  East  threatening  to  preoccupy  if  not  engulf  key   actors  in  the  Middle  East.   •  The  failure  of  Western  powers  and  Iran  to  make  substan%al  progress  in  nuclear  nego%a%ons  has  also   been  noted  by  markets  as  companies  around  the  world  wait  to  see  whether  a  sizeable  new  market  will   be  further  opened  to  the  world  or  will  once  again  be  confronted  by  economy  destroying  sanc%ons.   •  Narendra  Modi’s  failure  to  move  as  far  or  fast  on  economic  reform  as  many  had  hoped  and  uncertainty   about  the  outcome  of  the  presiden%al  elec%on  in  Indonesia  have  also  added  to  poli%cal  uncertainty  in   Australia  and  the  surrounding  region.    
  • ASIA  POLITICAL  RISK  OUTLOOK  
  • COUNTRY  IN  FOCUS:  CHINA  –  ANTI-­‐CORRUPTION   CAMPAIGN  SIGNALS  END  OF  CONSENSUS  LEADERSHIP   •  President  Xi  Jinping’s  an%-­‐corrup%on  drive  is   largely  targeted  at  fac%onal  opponents  and  their   supporters  and  is  the  most  aggressive  campaign   of  its  kind  in  20  years.     •  Markets  have  been  slow  to  understand  the   import  of  this  campaign  and  the  implica%ons  for   the  poli%cal  dynamic  in  the  world’s  second   largest  economy.   •  The  an%-­‐corrup%on  drive  is  also  an  aFempt  to   address  one  of  the  primary  concerns  of  the   public,  par%cularly  with  regard  to  local  officials,   and  illustrate  the  new  leadership’s  affinity  with   the  concerns  of  ordinary  people.   •  The  latest  campaign  comes  as  slowing  growth   increases  the  pressure  on  government  to   address  income  inequality  and  minimise  job   losses  in  the  transi%on  from  an  investment   driven  to  consumer  focused  economy.   Political risk outlook! 8! 30   35   40   45   50   55   60   2/04/2014   2/05/2014   2/06/2014   2/07/2014   China  poli%cal  risk  spread  
  • COUNTRY  IN  FOCUS:  INDIA  –  MARKETS  LOOKING  FOR   MORE  THAN  CHANGE  OF  GOVERNMENT   •  While  India’s  risk  spread  has  narrowed  slightly   over  recent  weeks  investors  remain  concerned   about  poli%cal  risk  in  the  country.   •  New  Prime  Minister  Narendra  Modi  has  failed  to   meet  early  expecta%ons  of  far-­‐reaching   economic  reforms  and  instead  has  signaled  he  is   likely  to  take  a  slower  approach.   •  A  number  of  trade  deals,  including  the  Doha   round,  are  at  risk  as  the  new  government   appears  reluctant  to  expose  India’s  agricultural   sector  to  extensive  liberalisa%on.   •  A  failure  to  tackle  a  number  of  economic   challenges  will  likely  result  in  a  further  widening   of  India’s  poli%cal  risk  spread  as  growing   discontent  among  the  country’s  youth  exposes   India  to  the  risk  of  social  upheaval.   Political risk outlook! 9! 170   175   180   185   190   195   2/04/2014   2/05/2014   2/06/2014   2/07/2014   India  poli%cal  risk  spread   57.5   58.5   59.5   60.5   61.5   62.5   63.5   USD  :  INR  
  • COUNTRY  IN  FOCUS:  INDONESIA  –  MARKETS  GROW   WARY  OF  UNCERTAIN  ELECTORAL  OUTCOME   •  Uncertainty  surrounding  the  outcome  of  the   presiden%al  elec%on  contributed  to  a  widening   poli%cal  risk  spread  over  recent  weeks.   •  While  Joko  Widodo’s  victory  now  appears  assured   there  remains  concern  about  the  new  President’s   ability  to  command  a  governing  majority  in  the   Parliament  where  he  will  be  dependent  upon  a   coali%on  of  par%es  to  deliver  legisla%ve  outcomes.     •  The  outcome  of  the  parliamentary  elec%on  is  a   reminder  of  Indonesia’s  fractured  poli%cs.  The   country  is  already  experiencing  high  levels  of   economic  na%onalism  and  Widodo’s  populist   approach  may  add  to  exis%ng  poli%cal  risks.     •  Investors  will  need  to  monitor  events  closely  as   Widodo  seeks  to  balance  the  compe%ng  interests  of   interna%onal  investors  and  his  domes%c   cons%tuency.  His  task  will  be  made  more  difficult  by   the  need  to  confront  bureaucra%c  corrup%on  across   the  country.   Political risk outlook! 10! 145   150   155   160   165   170   175   2/04/2014   2/05/2014   2/06/2014   2/07/2014   Indonesia  poli%cal  risk  spread   10000   10500   11000   11500   12000   12500   2013-­‐08-­‐01   2013-­‐09-­‐01   2013-­‐10-­‐01   2013-­‐11-­‐01   2013-­‐12-­‐01   2014-­‐01-­‐01   2014-­‐02-­‐01   2014-­‐03-­‐01   2014-­‐04-­‐01   2014-­‐05-­‐01   2014-­‐06-­‐01   2014-­‐07-­‐01   2014-­‐08-­‐01   USD  :  IDR  
  • GLOBAL  ISSUES  
  • THE  POLITICS  OF  OIL  –  MARKETS  CONFUSE  POLITICAL   EVENTS  WITH  POLITICAL  RISK   •  Markets  ini%ally  reacted  nervously  to  events  in   Ukraine  and  the  Middle  East  with  fears  that  oil  prices   would  spike  in  response  to  geo-­‐poli%cal  turmoil.   •  However,  as  Poli%cal  Monitor  forecast  in  June  markets   were  responding  to  broad-­‐based  geo-­‐poli%cal  events   and  not  paying  close  enough  aFen%on  to  country   specific  events.   •  Sanc%ons  against  Russia  are  unlikely  to  impact  its  oil   sales  nor  push  prices  higher  as  Europe  already  sources   large  volumes  from  elsewhere  and  much  of  Russia’s  oil   goes  to  countries  not  imposing  sanc%ons,  including   China.   •  Elsewhere,  the  Israeli-­‐Pales%nian  conflict  involves  two   non-­‐oil  producing  groups  while  events  in  Iraq  are  yet   to  impact  its  oil  produc%on  although  aFempts  by   Kurdish  authori%es  to  sell  oil  direct  to  the  world  should   be  watched.   •  Meanwhile,  growing  US  supply  con%nues  to  relieve   pressure  on  global  demand.   ! ! ! !! ! Political risk outlook! 12! 85   90   95   100   105   110   115   120   Brent  crude  &  WTI   WTI   Brent   0   2   4   6   8   10   12   Brent  crude  -­‐  WTI  spread  
  • THE  BATTLE  FOR  AFRICA  –  AUSTRALIAN  INVESTMENT   ON  AN  INCREASINGLY  RISKY  CONTINENT   •  Australia  has  considerable  exposure  to  Africa.   •  In  the  mining  sector  there  is  around  200   Australian  companies  involved  in  over  700   projects  across  37  African  countries.     •  One  in  20  Australian  companies  listed  on  the   Australian  Securi%es  Exchange  (ASX)  has  an   investment  in  Africa,  and  Africa  hosts  the   largest  number  of  Australian  mining  projects  in   any  region  outside  Australia,  at  around  40%  of   all  overseas  mining  projects.     •  Furthermore,  Australian  FDI  in  Africa  has   grown  75  percent  since  2006.   •  But  poli%cal  risks  are  on  the  rise  resul%ng  in   increasing  conflict  across  the  con%nent.   ! ! Political risk outlook! 13!
  • THE  BATTLE  FOR  AFRICA  –  AUSTRALIAN  INVESTMENT   ON  AN  INCREASINGLY  RISKY  CONTINENT   •  The  increase  in  conflict  and  the  risk  to  investors  is   a  consequence  of  four  broad  poli%cal  trends.   •  Extremism  –  the  return  of  extremist  groups  waging   war  and  engaging  in  terrorism  have  hit  at  the  heart   of  some  of  Africa’s  most  important  economies   including  Kenya  and  Nigeria.   •  Weak  borders  –  have  facilitated  the  easy   movement  of  extremist  groups  and  weapons.  The   aFack  on  a  Kenyan  shopping  mall  in  2013  was   commiFed  by  groups  based  in  Somalia.   •  Inter-­‐state  &  ethnic  conflict  –  is  retarding  the   growth  of  a  number  of  economies  including  oil  rich   South  Sudan.   •  Weak  governance  –  allows  rampant  corrup%on,   which  adds  to  social  discord  in  a  region  where  70%   of  the  popula%on  live  on  less  than  $2  per  day.  This   also  retards  the  growth  of  an  emerging  middle   class.   ! ! Political risk outlook! 14!
  • 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! 15!
  • 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! 16!
  • 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! 17!
  • APPENDIX  2  –  POLITICAL  RISK  SPREADS   •  The  Poli%cal  Monitor  poli%cal  risk  spread  is  a  proprietary  score  that  quan%fies  the  component  of  a   country’s  sovereign  risk  spread  (the  difference  between  yields  on  10  year  US  Treasuries  and   comparable  debt  in  respec%ve  countries)  aFributable  to  poli%cal  factors  such  as  stability  of   government,  judicial  independence,  corrup%on,  poverty  levels,  food  security  and  a  range  of   demographic  factors  such  as  the  size  of  the  popula%on  under  the  age  of  30.   •  The  poli%cal  risk  spread  allows  investors  to  make  a  clearer  dis%nc%on  between  the  different  types  of   risk  that  influence  sovereign  yields.  This  approach  means  investors  can  dis%nguish  between  poli%cal   risks  and  more  general  economic  risks  when  assessing  country  specific  investments.   •  The  scores  are  refreshed  daily  for  countries  where  publicly  available  data  on  bond  yields  are   available.  They  are  general  in  nature  and  do  not  take  into  account  the  capacity  of  individual  firms  to   manage  and  mi%gate  poli%cal  risk  in  each  market.   •  Poli%cal  Monitor  provides  poli%cal  risk  spreads  for  15  na%ons  across  Asia  and  7  in  which  Australia’s   major  mining  companies  have  opera%ons.   ! ! ! !! ! Political risk outlook! 18!
  • APPENDIX  3  -­‐  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  &  PeroK)   •  (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! 19!