By Stephanie Murphy, Daily News Business and Real Estate Writer
Published February 17, 2007 | Palm Beach Daily News
Bank Advises investors to consider political stability in rush assessment
Among the Wall Street firms pointing Americans toward companies engaged in overseas commerce, Citi Private Bank uses a custom formula for measuring economic risk and political stability in emerging markets.
Ian Bremmer, president of Eurasia Group, explained the relationship and the strategy recently at a Citigroup program for clients at The Colony. Bremmer, a political scientist, described why geopolitical risk matters to investors.
He is also the author of The J Curve, a New Way to Understand Why Nations Rise and Fall, written in part to illuminate the risks of investing abroad.
"The baseline of political instability is very important. What we are doing with Citigroup is taking political inputs and making it the third leg of the stool for economic recommendations," Bremmer said.
Energy remains top-of-mind for analysts of both politics and economics because sources for the foreseeable future are uncertain and many oil-producing nations are unstable, he said.
Also high on Bremmer's list is accelerating economic growth elsewhere, and the fact that the alpha is not the United States, but China and other emerging markets.
Are there places where politics matter more than in the United States?
"Yes... because you can't get China unless you also get the politics right," he said. He cited the flow of dangerous technology, as improvised explosive devices get smaller and more portable. Rogue states and rogue individuals have a disruptive effect on economics and politics, he said. With other world powers choosing their own rules of the road, politics is more of a driver; investors should understand who wins and who loses with globalization and plan accordingly, he said.
This year holds more problems than 2007 because the National Intelligence Estimate issued in December was more conservative than it should have been about Iranian weapons capabilities, he argued.
Bremmer cited some results of the new estimate:
- The likelihood of a U.S. attack is down
- Arabs lost support for U.S. policies on Iraq.
- Israel finds it a serious existential issue.
As a result, there will be no diplomatic resolution with Iran this year, and there will be more military confrontations like the Navy's January encounter with Iranian gunboats. "Iran got a free pass for the next five years,: Bremmer said.
For Israel, the threat is very real, Bremmer said. "Sixty percent of the country lives in Tel Aviv... One hit and it's the end of the Israeli experiment," he said. He referred to Israel's war last summer with Lebanon, when Hezbollah demonstrated the ability to hit targets in the Israeli city of Haifa. "Now they will be able to affect Israeli markets. The wealthy will leave," Bremmer said.
Improved relations with Iran do not depend on President Mahmoud Ahmadinjad being voted out of office because he is not the final authority in the Islamic nation, Bremmer said. "It doesn't remove the threat of (Iran's) supreme leader, who also calls the shots... There are two clocks in Iran: nuclear and political reform," he said. The United States will allow Iran to develop a nuclear program as long as it doesn't test its weapons, he predicted.
Elsewhere in 2008, Americans can expect more headlines about terrorism because conditions in Pakistan and Afghanistan are dramatically worse, Bremmer said. He discounted the likelihood of another event such as September 11, 2001, but forecast smaller attacks around the globe, more terrorism chatter and more alerts. "That will take the focus off the markets," he said.
In this election year, Americans don't feel fondly about globalization, he said. The focus on anti-immigration sentiments and homeland security will overshadow openness to free trade, warmer relations with China, and concerns about climate change. Meanwhile sovereign wealth funds of other countries are taking major stakes in American blue-chip stocks, he said.
Growth in the Chinese economy has led by the government, and it has been growing 10 percent a year for three decades. And while it isn't backing off coal, China plans to build 30 nuclear power plants during the next 30 years, an unheard of expansion, Bremmer said. "So no one wants to slow the Chinese juggernaut. There is a very big upside to those exposed to Chinese markets," he said. And if China keeps growing, it needs access to stable waterways. That furthers it dependence on the United States, which outspends the Chinese 5-1 on military might.
Following the recent World Economic Forum in Davos, Switzerland, Bremmer had business in Moscow, where the atmosphere reflect President Vladimir Putin's determination to play by Russian rules. "Boy, am I excited about Russian economic development," he said. "But the political situation is troubling. Russia likes to provoke the West about things that don't matter." Washington hates Moscow right now... but Wall Street doesn't. The Russians will do incredibly well. The three best sectors to bet on are oil and gas, arm sales and civilian nuclear energy." And because of global warming, Russia will have new shipping ports within five years in areas that used to be frozen over, he predicted.
Although Dmitry Medvedev will likely succeed Putin on March 2, he won't run the country, and that will create problems, Bremmer said.
"More geopolitics. If you get it right, you can forget worrying about the market stuff," he said. Bremmer does not invest in the countries he discusses but in other frontier markets, he said. "I'll be in a lot of emerging markets: Vietnam, Kenya, Egypt and Cambodia. I'd look at equities by sovereign wealth funds that need exposure," he said.
He said he is not worried about Pakistan because India has a lot to lose if it antagonizes its nuclear-armed neighbors with sabre-rattling.
"The risk I see is that the (global) terrorism issue will get dramatically worse," he said.