Money Markets
Political risk a major hindrance to growth in emerging markets
A well-wisher prays for the recovery of King Bhumibol Adulyadej of Thailand, the world longest reigning monarch. Political risks hurt emerging markets. Photo/REUTERS
As global markets come to the end of the broad recovery from last year’s crash, political risk is developing as key to which emerging markets underperform — with Romania, Thailand, Turkey and Latvia first to feel the pinch.
A Romanian coalition collapse, concerns over the health of Thailand’s king, tax risks in Turkey and the difficulty of forcing through austerity measures in Latvia undermined those markets last week, a sign investors are becoming more discriminating.
Those market moves contrasted with a much more positive trend to global markets, with benchmark emerging equities MSCIEF up some three per cent to around 14-month highs — having risen a blistering 70 per cent so far this year.
The desperate flight to safe havens from anything viewed as remotely risky that followed the collapse of Lehman Brothers last year was almost entirely undiscriminating and the flowback that accompanied the market recovery was equally herd-like.
But data from fund monitor EPFR shows that reflux is now almost 94 per cent complete.
That means investors will be playing and choosing between individual emerging markets for maximum return rather than simply shovelling money in or out of the asset class as a whole.
“A couple of months ago, people were buying literally everything because the prices looked very cheap,” said Michael Ganske, head of emerging markets at Commerzbank in London.
“Now the rally is more mature and prices are higher, people are differentiating much more and looking at the individual country factors, including political.”
If investors decide the rally has been overblown, what are perceived as riskier emerging market assets will likely be the first to be trimmed.
Stories like that of Ukraine’s state gas firm Naftogaz, which technically defaulted on a $500 million Eurobond last month, or Kazakhstan’s troubled banking sector, have put investors off holding the most uncertain assets.
The crisis has also made political risks more crucial than ever in a string of countries as they struggle to make painful adjustments to justify aid packages or retain the confidence of global financial markets.
In happier times, the failure of Romania’s ruling coalition might have had little market impact, with investors more focused on longer-term macroeconomic trends such as euro convergence, as well as shorter-term interest rate moves.
But with Romania dependent on a 20 billion euro ($29.88 billion) IMF bailout package which requires a government to push through painful budget cuts, any political instability that could prompt a delay in the IMF payments could have drastic economic and market repercussions.
Romania’s leu hit seven-month lows last week, notably underperforming the rest of the region, and is expected to remain under pressure while politics remains uncertain -- although without too much impact on the wider regional markets.
“Developments in Romania are unique to that country,” said Andrew Colquhoun, regional analyst at ratings agency Fitch.
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