That has led to worries that a withdrawal of billions of dollars of portfolio investment might itself exacerbate domestic economic ills and fuel even more anger on the street as foreign money vital for economic and jobs growth dries up.
Anti-government demonstrations in Hong Kong, Chile, Bolivia, Lebanon and elsewhere in recent months have proved as intense and durable as they were sudden and surprising.
The sharp market reaction has forced even seasoned money managers who pride themselves on an ability to navigate political risks often inherent in emerging markets to rethink.
Many work with in-house or external risk analysts to monitor everything from changes in taxation to social media to gauge the threat of civil strife, rebellion or even war.
The unrest confirmed that traditional risk measures like a sovereign’s willingness to pay its debts, or political stability, do not always fully capture the early signs of disorder and is hastening greater interest in broader indicators. Those might include internet freedom, and even the gender balance in school classrooms.
“It’s really about thinking where the next bit of unrest could occur and trying to preempt that,” said Richard House, CIO emerging market debt, Allianz Global Investors, which has 535 billion euros of assets under management. “Any whiff of unrest in these markets and that has a big impact on asset prices.”
Some asset prices have seen sharp collapses. Lebanon’s bonds trade at less than half their face value, Hong Kong stocks have tumbled around 13% since April and Chile’s peso hit record lows.
Popular discontent in Chile, which has enjoyed consistent economic growth and rising prosperity for years, came as a particular surprise. Indicators designed to flag such a possibility were found wanting when riots erupted in October.
With solid investment-grade credit ratings, Chile was ranked 18th out of 60 countries in BlackRock’s Sovereign Risk Index, which measures factors like debt levels and financial sector strength.
“We of course went immediately ‘what was our AI telling us about?’, and especially as this was a very solid country where institutions are very strong,” said Sergio Trigo Paz, head of emerging markets fixed income at BlackRock, the world’s largest asset manager.
Chile was an exception to the recent pattern of unrest, which tends to happen in the “fragile middle” nations which are semi-autocracies or weak democracies, said James Lockhart Smith, head of financial sector risk at Verisk Maplecroft.
Pembroke Emerging Markets trimmed its investments in Chile this month, having previously taken short positions on retailers there in expectation that consumer spending might suffer due to lower prices of copper, its main export.
“One of the things we’ve learned is that things change rapidly and when visibility becomes low it’s better to take smaller positions,” said Pembroke CIO Sanjiv Bhatia.
Particularly since protests flared, Pembroke regularly reviews the country risk analysis part of the criteria it uses to determine investment decisions, he said.