1. Alison Adams, PhD Boston Economic Club June 10 th, 2009 Alison Adams Research Portfolio Investing and Political Risk in Emerging Markets

2. Use Political Risk Rather than Manage it Alison Adams Research In a reactive sense, political risk has been seen as something to be avoided or managed For dedicated portfolio investors, political risk can be anticipated and exploited for enhanced returns Getting ahead of planned and unplanned events is the key

3. Structures and Style vs. Expertise Alison Adams Research Expertise is particularly useful for FDI, company specific intelligence, and lobbying. Upside: detailed analysis, sense of proximity to power, networking Downside: too close to the subject, often biased, and unduly pessimistic, experts have a bunker problem and often do not have a sense of scale Research shows that experts have a poor record for predictions about subjects they know very well

4. Structures and Style: Foundations for Using Political Risk Alison Adams Research Political Structures Upside: timing and rules, facilitates comparison with peers, facilitates organization and ranking of detailed information Downside: can be too broad, can encourage over confidence Political Styles Upside: preparation for unscheduled events, facilitates comparison, anticipate policy decisions Downside: can be too broad, encourages over confidence, style can be malleable.

5. Non-tradable Political Risk Alison Adams Research Strategic risk: tends to be slow moving and not conducive to an investment strategy. For example, N. Korea, Iran, and Russian expansionism Terrorism: tends to be opportunistic and impact is local and temporary. For example, bombings in India, Turkey, and Thailand Extremely important for governments but not necessarily for economic performance

6. Tradable Political Risk Alison Adams Research Scheduled events and anticipated volatility Local and national elections Summits Unscheduled events and reactive investing Protests and popular unrest Government collapse Scandal and corruption

7. Political Structures Alison Adams Research Parliamentary Systems: Presidential Parliamentary Systems: Presidential Systems: Each structure affords different investment opportunities for the portfolio investor in the form of contrarian views and appropriate risk aversion.

8. Parliamentary System Alison Adams Research Parliamentary systems are generally: Low risk and slow to change Coalition governments disperse ministries according to interest. i.e. the Left gets the Labor Ministry Take alarmist views with a grain of salt. For example, the recent election in India I would generally view long positions as secure

9. Presidential Parliamentary Systems Alison Adams Research Range from benign to unstable; a case by case reading is necessary President versus Prime Minister is unstable: Ukraine President with the Prime Minister is stable: Turkey-before and after President Gul

10. Presidential Systems Alison Adams Research Presidential systems can change direction substantially in a winner take all context Regime change can be deep in key ministries Business/government relationships vulnerable Polling is crucial to determine long: short decisions Big bets are possible: Brazil and Lula’s first term; AMLO’s loss in Mexico

11. Political Style Alison Adams Research Why it matters for policy analysis In opaque policy situations, political style is a powerful guide to anticipate policy decisions. i.e. Ecuador’s default Rule of law is not clear but style is clear. i.e. Putin and TNK-BP; Erdogan in Turkey It matters to the politicians themselves and defines limits of loyalty and discipline. i.e. ANC National Executive Committee in South Africa

12. Debunking Political Assumptions Alison Adams Research In Emerging Markets –all political parties believe in state sponsored growth to one degree or another. At this point, most political parties are reasonably market friendly. (Ignore swing to the left labels) What matters most is the quality and quantity of technocrats and willingness to establish best practices. AKP in Turkey, PAN in Mexico

13. Anticipating Policy Change Alison Adams Research Not an exact science; but there are clear tendencies. Transparent democratic processes produce more populist policy Opaque committee processes produce more balanced results Civil Law tradition courts usually do not make new law [a notable exception is Turkey’s Constitutional Court] Presidential decrees will be arbitrary and difficult to anticipate. i.e. Argentina and Venezuela Rent seeking behavior around natural resources is inevitable.

14. Conclusions: Alison Adams Research It is possible to use political risk to maximize returns Political risk is endogenous to emerging markets Risk must be put in a relative context Not all risk is tradable Presentation is available at www.alisonadamsllc.com