By Charlie Robertson
THUR, MAY 25 2017-This semi-annual report hopefully provides you with much of the key macro data you need on all emerging (EM) and frontier markets (FM) until our next update in November.
We leave it to other banks to offer decimal-place opinions on how much US growth of 2.0-2.5% will exceed Eurozone growth of 1.5-2.0% in 2017, or whether the US Fed hikes two or three times. Providing the (worrying) Chinese loan slowdown is temporary, we assume a broad status quo over the coming months. This economist expects our proxy for commodity prices, oil, to remain within $10/bl of $45/bl for the next decade.
Within EM, GDP growth acceleration is most obvious in EEMEA in 2017 and this will still be the case in 2018. We see this as supported by credit growth acceleration in Hungary, Russia, Turkey, and in 2018, Egypt too. Among FM countries, it is Africans, from Morocco to Nigeria and Tunisia which should see rapid growth acceleration in 2017, and oil exporters more broadly should accelerate most in 2018 even under IMF assumptions of oil remaining flat at $56/bl in 2017-2018. Kazakhstan looks very interesting, for currency, growth and reform reasons.
Also positive for EEMEA, FM and Africa, is that the credit rating downgrade cycle seems to be largely over. There have been two upgrades in FM vs one downgrade, and only one downgrade in the SSA countries we follow compared with six in all of 2015 and again in six in 2016.
Underpinning all of this relative optimism are currencies and local currency bond trades that we believe offer good value, especially in Egypt, but also in Turkey and (until 2H17) South Africa (SA), as well as FM such as Ghana. Indeed, EM FX overall looks relatively good value. Nigeria is now delivering additional FX reform, and at around NGN400/$, we view the currency as a little cheap. Global politics is still digesting the 10-15-year aftershock of the global financial crisis, so like a few others, we look at the theme of populism. We think markets can discount nationalism and efforts to strengthen the executive, but investors are hurt when populist governments go after companies and sectors such as banks, energy, etc. We saw this in Russia (2004), Hungary (2010+), Turkey (2013), Poland (2015) but as yet, not in SA. Curiously, our work suggests bond investors have less to fear from populist governments.
We also save you a week’s reading by summing up the biographies we have read on President Donald Trump. Our conclusions are: 1) his attention-seeking behaviour will never stop, 2) we should fear his protectionism, particularly if the US economy goes into a recession, and 3) his understanding of truth is subjective, not objective, so his statements cannot let us predict his actions.
We show that strong legal systems should protect rich countries from the excesses of populist leaders. EM and FM countries are therefore more vulnerable, but fortunately populism is less obvious in FM.
We flag the strong pro-business reforms being advanced from Indonesia in 2016 to Nigeria in 2017 and expect good progress in Ghana too.
This analyst’s top pick for reform, FX and yield is still Egypt, but Ghana and Zambia warrant attention too. Russia continues its recovery while Turkey’s credit-fuelled growth model has been given a temporary boost for another year. We think CE3 and Kazakhstan deserve a look, as do the Frontier Asian rivals to (soon to be promoted) Pakistan. The ZAR may struggle later in 2017, undermining the SA market. Kenya is more complicated until the August elections are passed. Overall, economic (but not political) trends appear benign.
Does populism matter?
Even before Trump’s presidential election victory, commentators were writing that politics was moving from the left/right spectrum to an up/down model. That precisely describes populism, which sets the will of the masses (Latin populus) against the incumbent elites, usually combined with an attack on ‘outsiders’ who are also identified as the enemy. This definition captures both the Brexit and Trump phenomena.
In a useful exercise, Ray Dalio’s Bridgewater published a piece in March 2017 that outlined the key features of populist movements in the past. It avoided overly generic definitions that might be true of any government seeking popularity (ie higher spending and tax cuts). Instead it focused on semi-measurable themes that were common to most populist movements.
It also paid a lot of attention to the 1930s and this caught our attention. As we have written previously, we think the Global Financial Crisis was an echo of the 1930s’ Great Depression, and a mirror image of the 1970s crash1. This should drive politics in Anglo-Saxon countries away from neo-liberalism (and income inequality) over a 10-15-year period. Curiously, in our research for this piece, we also found a presentation entitled Why did the Populist movement fail? talking about 1877-1900 America. Why do these dates matter? Because they followed the Long Depression of that period (once called the Great Depression). Economic shocks and populist movements are closely linked.
We agree populism today is an echo of the 1930s (and 1870s). But unlike the 1930s, present-day populism does not go hand in hand with dictatorship, at least in developed markets (DM), because western democracies are far richer, and rich democracies are immortal2.
What about populism in EM and FM? Bridgewater chose not to talk about present-day populists, in DM or EM markets. We are prepared to take that risk. And more important, we try to answer the question of whether populism matters to equity or bond investors.
Using the Bridgewater categories, we can see that there are populist themes in many MSCI EEMEA countries. The most common is nationalism (or patriotism in Russia) and the shift towards a stronger executive (as in Turkey on 16 April 2017), but neither we see as necessarily problematic for investors. Nationalism can help unify a country. A more powerful executive can be welcomed if it means more effective government. We are also not sure that an anti-immigrant or anti-foreigner bias is necessarily negative for investors. It is negative for the economy when immigrants and foreigners are offsetting labour shortages and their absence would be inflationary, or when foreign investors are discouraged from investing in a country.
The single policy that seems most market-negative are attacks on banks and corporations. When Russia went after Yukos, which was dressed up in the populist clothes of collecting taxes due to the nation from an elitist oligarch, the stock market suffered. We have seen numerous examples of this elsewhere.
When Hungary penalised (mainly foreign-owned) banks after 2010 and then (foreign-owned) utilities, retailers and telecom companies, the equity market suffered. The MSCI Hungary equity index in dollars has still not recovered to the 2010-2011 levels that greeted Fidesz when it took power. But Hungary never adopted an anti-trade model. Indeed, it positively welcomed foreign direct investment into the export-orientated car industry. This helped improve the current account deficit, supporting the currency and helping drive down inflation, which in turn attracted foreign bond investors into the local market. Aside from a spike in yields into early 2012, exacerbated by global market weakness, bond investors have done well from populist government in Hungary.
From Greece to Venezuela, and more recently Poland to Kenya (with interest rate caps and hints of a possible attack on Safaricom), populist policies have seen equities get marked down. But in Poland (as well as Hungary), populist policies have not proved particularly bond negative. As of mid-April 2017, 10-year yields were only up roughly 50 bpts since the PiS came to power in late 2015. Greek bonds have been more turbulent, but are only up 100 bpts on mid-2014 lows.
In President Recep Tayyip Erdogan’s first two terms in office as prime minister, businesses and banks did well. But after the Geza Park protests, certain opposition-linked companies did suffer and this has intensified under the recent State of Emergency imposed after the 2016 coup attempt. The MSCI Turkey index in dollars has nearly halved from the early 2013 high. Again it appears to be when populist governments attack companies or entire sectors, that equity investors suffer.
By contrast, Trump may play the populist card, but he helps banks and corporations via deregulation and tax cuts. So far, the primary ‘attacks’ on companies have been via twitter and these have had little market effect. His overall policy mix has so far been supportive of equities.
For most of the other countries we cover, from the Czech Republic to Egypt, and from Nigeria to Morocco or Pakistan, there are few features of populism in existence. Yes, currency policy is hurting the banks and corporations in Nigeria, but this is not a populist assault on them. Protectionism is obvious in the high tariff barriers and import bans on 41 categories of items (which may be removed shortly), but the former is a decades long policy theme, and the goal is to develop successful Nigerian industries, not to bring them down.
Why should so many EMs and FMs be immune to this new wave of populism? Perhaps because the GFC did not undermine faith in the experts as it did in the US and UK.
Other examples of populism range from Argentina under the Kirchners to the Philippines. Equity investors initially did well in Argentina despite their populism, thanks to booming commodity prices and post-devaluation benefits. In the long run, populism ruined the currency and the economy. In the Philippines, bashing nickel companies and telling US companies to go home has not been helpful, but neither policy has been a policy priority for the new president. Its MSCI index in dollars in early May 2017 is roughly the same level as in May 2016.
SA is beginning to show some signs of populism but, as yet, this has not manifested itself via attacks on the banks or corporates. We are concerned that President Jacob Zuma’s promise of radical economic transformation may lead to just that policy stance. We may learn more about this in June.
The key message here is that populism matters to equity investors when governments go after banks and corporations. In EEMEA, Greece, Poland, Turkey and Hungary are all led by governments that might negatively surprise markets. Russia and SA are potentially vulnerable to it. The Czech Republic (despite ANO 2011’s likely success in the 2017 elections), the UAE, Qatar and Egypt seem relatively safe at present from populist interference.
To be continued
Charlie Robertson is the Global Chief Economist at Renaissance Capital.