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Around The Curve
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Part 2: How Should Investors Think about Political Risk?

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  • We continue our political analysis which leverages economic indicators to identify important structural shifts in emerging market countries.
  • Although household consumption has steadily risen, the change in nominal wages suggests that deeper issues like income inequality may spark changes in political sentiment.
  • The public’s perception of governance and corruption should also be factored into this analysis, as economic data may betray sentiment.

The economies of Brazil, India, Mexico, and South Africa have undergone an important structural shift since the 1990s, where private consumption has overtaken government spending and exports as the main contributor of GDP. On the surface, consumption remains intact in Chart 1:

Chart 1

While consumption might be increasing over time, what’s of paramount importance is whether the average person is getting his/her “fair share” of that economic pie. Looking at the percentage increase of nominal wages year over year in Chart 2 doesn’t paint a particularly sanguine outlook, even in South Africa, given the unemployment rate has stayed around 25% since the GFC and now stands at 27%.

Chart 2

Sentiment Factors

Once wage inequality is factored into the analysis, investors could get a better sense of the latent discontent within the populace that may belie traditional economic indicators. These quantitative and qualitative factors may collectively signal when domestic conditions are primed for a shift toward populism. South Africa, Brazil, and Mexico all have higher incidents of wage inequality relative to the average for upper-middle income economies; India is noticeably absent from the International Labor Organization’s study.

Chart 3

Evaluating the perceived level of corruption within a given country should also complement a review of income inequality. For example, the Word Bank created a corruption index that estimates the effectiveness of governance on a scale from -2.5 (weak) to 2.5 (strong). The table below shows a significant deterioration in Brazil and Mexico over the last decade, while the perception in India weakened to a decade low shortly before Modi and the BJP won the election.

Chart 4

While these estimates are merely a gauge for sentiment, we can perhaps use them to anticipate a significant shift in political ideology that could price information risk into local assets.


For investors looking to handicap a political outcome or simply understand a country’s civic undercurrent, we suggest taking a comprehensive look at economic datapoints such as GDP growth and unemployment along with sentiment factors like perceived income inequality and corruption. Traditionally bond investors have focused on valuation models but more recently, political uncertainty has played an increasing role in short and longer-term volatility. Though our focus is on the long term, there is merit in trying to gauge the difference between short- and long-term spread widening resulting from political and geopolitical volatility. The recent election results in India highlight the importance of factoring sentiment indicators into an economic analysis, as domestic perceptions of corruption have improved while Indian GDP has undershot market expectations. Modi’s landslide victory also raises the question of how long these cyclical shifts toward populism will last. Therefore, adept investors should leverage hard and soft indicators to anticipate or better understand these shifts and the potential changes in legislative representation and policymaking.

Groupthink is bad, especially at investment management firms. Brandywine Global therefore takes special care to ensure our corporate culture and investment processes support the articulation of diverse viewpoints. This blog is no different. The opinions expressed by our bloggers may sometimes challenge active positioning within one or more of our strategies. Each blogger represents one market view amongst many expressed at Brandywine Global. Although individual opinions will differ, our investment process and macro outlook will remain driven by a team approach.

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