Discussing politics in an election season may be something you
would rather avoid. But for investors planning to put money into
emerging markets (
EEM
,
quote
), it's important to have a basic grasp of the political context in
a given country.
[caption id="attachment_55007" align="alignright" width="300"
caption="Knowing Cristina Fernández de Kirchner's
politics could have saved investors in YPF a barrel of money"]
[/caption]
While delving into a country's politics will never replace
important quantitative elements of a national economy like its
trade deficit, GDP growth, or inflation, understanding the
prerogatives of a given political regime can help you narrow down
potential winners, and also eliminate likely losers.
For example, anyone who had followed Argentina's (
ARGT
,
quote
) politics during the Kirchner era would have been
aware of Cristina Fernández de Kirchner's
proclivities
towards both obfuscating the truth and potentially increased
nationalization. As a result of this opaqueness and occasional
neglect of the basic underpinnings of capitalism, investors could
have avoided getting sucked into the
YPF
(
quote
) fiasco.
By understanding the fundamental problems in Indian (
INDY
,
quote
) democracy, investors could have easily seen that the country
would be plagued in the short-to-medium term
by political gridlock
that would have a palpable effect on the structural foundations of
the country's economy.
Conversely, a basic understanding of the country's political
system can also help spot potential winning investments. One
political party in South Korea (
EWY
,
quote
) is known
for their close ties to the
chaebols
,
which could make big Korean firms attractive when this party is in
power.
Certain Chinese firms that have ties to the government, like
CNOOC (
CEO
,
quote
), or that
have been protected from foreign competition
in the past by the government, like Baidu (
BIDU
,
quote
), may have an advantage over competitors that could yield a
profitable investment.While investing in a company based solely on
the political climate is not a great idea, knowing that a company
may be treated favorably or unfavorably in the future by the
government should be a factor in any emerging market investment
decision.