Which came first, the chicken or the egg — or, in this case, political turmoil or economic turmoil? During his presentation, Eric Rice, managing director at Wellington Management Company LLP, dug into how politics has been upstaging economics when it comes to investments.
Asked Rice, how can we tell when political concerns override economic or financial ones? To answer that question, it can be important for investors to think like investigative journalists: for instance, looking at a country and watching who leads because sometimes there is a single motivated leader who can change anything, Rice said.
He used India as an example. In 2012, there was no motivated leader and the economy was sinking. “The key was not that there was corruption in the economy, but that corruption had actually become the economy,” he said.
This was turned around with the rise of Prime Minister Narendra Modi who brought forward change. According to Rice, this political turnaround led to an economic recovery for the country and investment opportunities.
He used Russia as a counter-example — a country investors should approach with hesitation. President Vladimir Putin has taken a step backwards for Russia. Since Putin came into office, explained Rice, Russia’s rating on the Freedom House’s freedom index has steadily and sharply declined.
Rice cautions that this is not an opportunity he would take advantage of because it is clear that politics has played a stronger role than markets. “At the same time as that freedom index was sinking, Putin’s popularity was stable and rising,” Rice explained. “This fact made it very clear that politics was what it’s all about,” he added.
When looking for opportunity, it is important for investors to question their own long-standing beliefs, advised Rice. For example, in the past, Colombia was for a long time considered an unstable and dangerous region. The reality is, however, that the society has been developing and the country has stabilized. Markets have moved in response.
Rice suggested that investors visit and experience countries for themselves to gain a real understanding of the investment opportunities instead of just relying on news and external sources.
Rice pointed to some of the countries he thinks are economically on the upswing right now, including Colombia, India, Puerto Rico and Argentina. Countries he sees experiencing political and economic difficulties today are Russia, Turkey and South Africa, all of which, he says, warrant investor caution.
He concluded with the message that economics only reigns when politics allows it to. “What I’ve found is that if something seems logical and obvious to the financial markets, but it’s politically very challenging, then that financial logic is unlikely to prevail,” Rice explained.