2014 has rapidly turned into the year of geopolitics. Here are some of the key developments.
For emerging market investors generally the issue of politics is something that has to be considered as part of the package of factors – along with those such as accounting practices and investor protection – that make it an asset class offering potentially greater rewards against higher levels of risk.
That is a point noted by Duncan Hodnett, director of Institutional Business Development, Europe, and Paul Bouchey, managing director, Research at Parametric, one of the brands offered by Eaton Vance.
The point of emerging market investing from their perspective is not to necessarily find the highest growth stocks, or cheapest stocks, but how to manage higher levels of risk – not to get rid of it, but to manage it – they suggest. One answer is to invest broadly across a number of countries; in Parametric’s case it is to look across more than 40 or so and rebalance as events and valuations change. Investing in single countries results in significantly higher risk as the likes of Ukraine have shown recently.
The ‘hot’ example of political risk in Europe has escaped nobody’s attention, marking as it does in the eyes of many observers the beginning of a new type of relationship with one of the EU’s biggest suppliers of energy and raw materials – Russia.
Monica Defend, head of Global Asset Allocation Research at Pioneer Investments in Milan, has said recently that the crisis between Russia and Ukraine “may make markets volatile, but we need to evaluate Russia’s next steps to assess the risk facing not only European but also global equity markets.”
“A military intervention in eastern Ukraine with implications for social stability, would spark even more volatility amid fears of a civil war, whereas the impact on markets would be contained if the crisis stopped in Crimea for now.
“We believe it is not in Russia’s interest to exacerbate relations with Europe due to the sizeable foreign trade.
“Ukraine for its part is a midsized economy and shouldn’t have wider implications, but this too may change if the crisis involved other Great Powers (US, China) and a sharp rise in oil prices would be a clear indication of that as Russia is of course a major exporter.”
For Europe the key hydrocarbon threat might not be oil, but gas. Platts, the specialist provider of commodities markets data and prices, reported comments on 8 April from Ukraine’s energy minister Yuriy Prodan, to the effect that shipments of gas to Europe via Ukraine could be threatened by the significant price increases passed on by its Russian suppliers.
“In this situation [of a high gas price for Kiev], there is a risk of halts in gas supplies to Ukraine and corresponding threat of halts in transit of gas to Europe because Ukraine’s options for maintaining transit are limited,” Prodan was originally quoted by Russian news agency Prime.
Platts noted that the gas price quoted for Ukraine increased by 80% to $485 per 1,000 cubic metres between the first and second quarters of 2014.