Saudi Press

Saudi Arabia and the world
Saturday, Feb 22, 2025

Burst of social unrest tests emerging market risk models

Burst of social unrest tests emerging market risk models

A wave of social unrest across developing countries this year has caught many investors off-guard and is challenging models designed to gauge political risk for investors, prompting some to pull money out.

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.


COMMON THREADS

Investors are seeking common threads between the protests, such as wealth disparity, unemployment and lack of political voice, to help identify countries that may be vulnerable to similar instability.

“Most Middle East countries have very young populations, high income inequality, so we’re avoiding places like Jordan and Oman which have similar demographics to places like Lebanon and Iraq,” said Allianz’s House.

Allianz cut its exposure to Colombia before recent strikes there began.

BNP Paribas Asset Management, with 436 billion euros (374.6 billion pounds) in assets under management, was already mostly out of Bolivia and Venezuela before events escalated thanks to its own assessment matrix, said Bryan Carter, head of emerging market fixed income.

“Can we imagine military dictatorships coming back in Latin America or going back to the 80s and the 90s? That is completely unimaginable in a country like Chile, no way. But in Bolivia, I don’t know if I would say that so quickly,” he said.

It is not clear yet if the unrest has sparked a broad retrenchment. Chile saw equity outflows of $24.2 million in October but a partial rebound in the month to Nov. 22.

Emerging market equity funds lost $3.2 billion in October when protests erupted in Ecuador, Bolivia and Lebanon, but nearly half has since returned. Bond funds added $3.7 billion in October, then lost $326.1 billion in November.

The unrest has raised scrutiny of countries with high levels of violence, discrimination against women, corruption or weak rule of law, which have been among protesters’ concerns.

“It reinforces the premise that country selection matters, nowhere more than in EMs, where freedom levels vary so widely between countries,” said Perth Tolle, founder of Life + Liberty Indexes, a freedom-weighted emerging market equity strategy.

Tolle cited clients considering cutting China exposure, in part because of Beijing’s response to the Hong Kong protests.

Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
Saudi Arabia and the United States Strengthen Ties Amid Global Developments
Saudi Arabia Hosts Global Conference to Promote Islamic Unity
The Impact of Artificial Intelligence on Education and Child Development
Saudi Arabia Announces Competition for Best Founding Day Outfits
Saudi-EU Food Security Officials Hold Talks to Strengthen Collaboration
Putin Expresses Gratitude to Saudi Crown Prince for Hosting US-Russia Talks
UK and Saudi Arabia Enhance Collaboration in Innovation and Technology
Denmark's Embassy in Riyadh Showcases Danish Cuisine with Saudi Influence
Saudi Artist Salman Al-Amir Unveils 'Tafawut' Exhibition in Riyadh
Saudi Arabia Offers Condolences to Kuwait Following Military Exercise Fatalities
Saudi Ministry of Islamic Affairs Completes Ramadan Preparations in Madinah
Etidal Secretary-General Hosts UN Counter-Terrorism Director in Riyadh
ADNOC Drilling Targets Over $1 Billion in Investments for 2025 Amid Gulf Expansion Plans
Derayah Financial Achieves Remarkable Growth in Saudi Brokerage and Asset Management
Saudi Arabia Shortlists 30 Firms for Mining Licenses in Eastern Province and Tabuk
Saudi Foreign Minister Engages Counterparts at G20 Meeting in Johannesburg
Oil Prices Decline Amid Rising US Inventories
Saudi Arabia's NDMC Plans Green Bond Issuance by 2025
Moody’s Affirms Egypt’s Caa1 Rating Amid Positive Economic Outlook
Oman and Saudi Arabia Strengthen Economic Ties with New Agreements
Saudi Arabia Investments Propel Expansion of Qurayyah Power Plant
Saudi Capital Market Authority Advances SPACs and Direct Listings
Global Energy Leaders Gather in Riyadh for Symposium on Energy Outlooks
Al-Ahsa Region Sees 500% Growth in Tourism as Saudi Arabia Prioritizes Development
Saudi Arabia Advances Entrepreneurial Ecosystem in Al-Ahsa with New Agreement
King Salman Approves Official Saudi Riyal Symbol
Saudi Credit Card Lending Reaches $8.4 Billion Amid Digital Payment Expansion
King Salman Approves Official Symbol for Saudi Riyal
Putin Thanks Saudi Crown Prince for Facilitating U.S.-Russia Discussions
Saudi Foreign Minister Attends G20 Meeting in Johannesburg
Saudi Arabia Prepares for Nationwide Founding Day Celebrations
Inauguration of Hira Park and Walkway Enhances Jeddah's Urban Landscape
Crown Prince Hosts Leaders for Informal Meeting in Riyadh Amid Gaza Rebuilding Plans
Saudi Official Highlights Achievements and Media's Role in National Transformation
Three Expatriate Women Arrested for Prostitution in Riyadh
Saudi Arabia's Diplomatic Evolution Highlighted at Saudi Media Forum
Healthy Eating and Preparation Essential for Ramadan Fasting
Saudi Arabia and Japan Forge Sustainable Textile Partnership
Advanced Limb Surgery Restores Mobility in Pediatric Cancer Patient
Jeddah Event Explores AI's Role in Boosting Saudi Arabia's SME Sector
UN Representative Highlights AI's Role in Perpetuating Gender Stereotypes
Saudi and Jordanian Leaders Discuss Enhanced Security Cooperation in Amman
Saudi British Society Honors Cultural Bridge-Builders at London Gala
Saudi Media Forum 2025 Explores AI's Role in Modern Journalism
Saudi Arabia's Saqer Al-Moqbel Appointed as WTO General Council President for 2025–2026
Saudi Deputy Ministers Engage in Diplomatic Discussions with U.S. and Dutch Officials in Riyadh
Saudi Arabia to Launch Iftar Program in 61 Countries During Ramadan
Saudi Visitors Expected to Spend £942 Million in UK During 2025
Saudi Arabia Gifts Kaaba's Kiswah to Uzbekistan's Center of Islamic Civilization
Digital Cooperation Organization Concludes Fourth General Assembly with Multiple Agreements
×