Samson said that Eurasia, which has about 60 analysts looking at country-level risks and cross-border geopolitical issues for roughly 100 countries, turns qualitative factors into quantitative input.
In 2015, Nikko struck a partnership with the research firm “to understand political risk rather than taking it as an input”, Samson said.
Analysts provide the multi-asset team with country scores that estimate current and future levels of political stability and the impact on business.
“[The political risk analysis] allows us to make decisions based on the data as it happens as opposed to an afterthought. We can ask, what does this political event mean in my investment context? We are interested in how things are expected to change.
“We look at six months and at two years and estimate whether things are going to improve or stay where they are or deteriorate.”
Comparative advantage
Assessing political analysis when investing is nothing new. But Samson said a key difference with Eurasia is that the political risk scores can be compared to other countries across EM.
“[By comparison], with sell side analysis, it is hard to find someone consistently good in multiple countries. A sell side analyst may know Turkey but not Mexico or Brazil. So the way to look at Eurasia Group analysis is a deep evaluation on the country level and an objective quantitative score that gives us an apples-to-apples comparison of these countries in terms of political risk and changing trajectories.”
He said that the comparative country political analysis has helped the team’s investment decisions.
As an example, he cited Eastern Europe investments. Eurasia’s trajectory score for Poland after the 2015 elections signaled a shift to a more populist agenda while the scores for Hungary suggested a turn from populist to more business-friendly markets, all of which unfolded.
Samson said the multi-asset team used the trajectory scores, integrated within its own investment process, to shape allocation and the portfolio benefitted.
“The key is the integration. Trajectories, along with other political quant and qualitative data that we get from Eurasia Group, are integrated with our own investment inputs for a single, cohesive process.”
However, the bigger geopolitical events in 2016 were unforeseen. Samson said Eurasia didn’t see the Trump win coming and on Brexit they were on the fence.
“But we’re more interested in nuances at the emerging markets country level. We construct our positioning in the portfolio relative to anything that could happen. We don’t look for those directional bets on big political outcomes.”
EM divergence
Political risk has always been important to EM investment. But Samson believes deeper analysis is required today because since 2008 there has been “a structural break in the marketplace”. Emerging markets diverged, driven by commodity dependency and structural reforms.
In addition, before 2008, in an EM multi-asset portfolio equally weighted in equities, bonds and currencies, equity would have contributed around 70% of the risk, according to Nikko research.
Now the firm finds that bonds and currency – assets often driven by politics – account for as much as 50% of risk.
He added that political risk used to be fashionable around emerging markets.
“Now it is becoming a developed market issue as well and we do have other investment teams that tap into the research.”
