political risk outlook investment pack - april 2014

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Poli%cal risk outlook – investment pack April 2014

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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.!

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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. [email protected] ! ! !e. [email protected] !

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!

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Political risk outlook! 3!

AUSTRALIAN POLITICAL RISK OUTLOOK

AUSTRALIAN POLITICAL RISK INDEX – political uncertainty hit a 6 month high in March!


•  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 U

ncertainty Score

Poli%cal Risk Index

AUSTRALIAN POLITICAL RISK INDEX & ASX200 – political & policy uncertainty continues to weigh on key indices!


4800

4900

5000

5100

5200

5300

5400

5500

0

2

4

6

8

10

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14

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18

ASX 200

Poli%

cal U

ncertainty Score

Poli%cal Risk Index vs. ASX 200

PRI ASX 200

STATE GOVERNMENT RISK INDEX – state governments present elevated risk for investors!


•  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.

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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

ASIA POLITICAL RISK OUTLOOK

ASIA POLITICAL RISK INDEX – rising food prices are adding to tensions already evident across the region


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.

ASIA POLITICAL RISK INDEX – price rises are greatest in countries already rated a VERY HIGH risk on the Asia Poli2cal Risk Index


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.

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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

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.


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

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USD : Indonesian Rupiah

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.


50

52

54

56

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62

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USD : Indian rupee

GLOBAL ISSUES

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.!

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! Political risk outlook! 14!

550

600

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700

750

2/01/2014 2/02/2014 2/03/2014

CBOT Wheat Futures

3.5

4

4.5

5

5.5

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6.5

2/01/2014 2/02/2014 2/03/2014

NYMEX Natural Gas Futures

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.

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1/01/08

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Economic Policy Uncertainty Index -‐ Europe

2 2.5 3

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4.5 5

French share of global GDP based on PPP, %

THE FUTURE OF THE EU – UNEMPLOYMENT A KEY DRIVER OF SUPPORT FOR RIGHT WING PARTIES


European unemployment rates – Feb 2014 (seasonally adjusted)

THE FUTURE OF THE EU – ELEVATED LEVELS OF YOUTH UNEMPLOYMENT UNDERPIN ANTI-‐EU SUPPORT


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10.0

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26.0

2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4

EU unemployment -‐ total pop. versus youth

Unemployment -‐ total popula%on (%) Unemployment -‐ youth (%)

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. ! ! !!


Detailed analysis on these and other political risks confronting investors can be found at www.politicalmonitor.com.au!

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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!

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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!

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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.

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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.

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political risk outlook investment pack - april 2014

Economy & Finance