Political Risk and Emerging Markets

Around the Curve

Political Risk and Emerging Markets

The impact of political realities on sentiment provides an important counterpoint to traditional economic indicators when evaluating structural shifts in emerging market countries.

Key Takeaways

  • Although household consumption has steadily risen, the change in nominal wages suggests that deeper issues like income inequality may spark changes in political sentiment.
  • The public’s perception of governance and corruption should also be factored into this analysis, as economic data may betray sentiment.


The economies of Brazil, India, Mexico, and South Africa have undergone an important structural shift since the 1990s, where private consumption has overtaken government spending and exports as the main contributor of GDP. On the surface, consumption remains intact in Chart 1:


Chart 1: GDP: Household Consumption

Source: Haver Analytics. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


While consumption might be increasing over time, what’s of paramount importance is whether the average person is getting his/her “fair share” of that economic pie. Looking at the percentage increase of nominal wages year over year in Chart 2 doesn’t paint a particularly sanguine outlook, even in South Africa, given the unemployment rate has stayed around 25% since the GFC and now stands at 27%.


Chart 2: Percent Change in Nominal Wages

Sources: International Labor Organisation, 1 Statistics South Africa,  2 Government of India Ministry of Statistics and Programme Implementation, 3 Brazilian Institute of Geography and Statistics (IBGE), 4 Mexico National Employment Service Job Portal. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


Sentiment Factors

Once wage inequality is factored into the analysis, investors could get a better sense of the latent discontent within the populace that may belie traditional economic indicators. These quantitative and qualitative factors may collectively signal when domestic conditions are primed for a shift toward populism. South Africa, Brazil, and Mexico all have higher incidents of wage inequality relative to the average for upper-middle income economies; India is noticeably absent from the International Labor Organization’s study.


Chart 3: Gini Estimates of Wage Inequality in Upper-Middle Income Countries - Hourly wages, Gini coefficient

Source: International Labor Organization. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


Evaluating the perceived level of corruption within a given country should also complement a review of income inequality. For example, the Word Bank created a corruption index that estimates the effectiveness of governance on a scale from -2.5 (weak) to 2.5 (strong). The table below shows a significant deterioration in Brazil and Mexico over the last decade, while the perception in India weakened to a decade low shortly before Modi and the BJP won the election.

Table 1: Perceptions of Governance and Corruption

Source: World Bank. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


While these estimates are merely a gauge for sentiment, we can perhaps use them to anticipate a significant shift in political ideology that could price information risk into local assets.


For investors looking to handicap a political outcome or simply understand a country’s civic undercurrent, we suggest taking a comprehensive look at economic datapoints such as GDP growth and unemployment along with sentiment factors like income inequality and corruption. While the average voter may not pay attention to current account deficits, they do, in fact, matter. The ability of a government to address persistent income inequality or high unemployment lies in their current accounts, because a surplus provides the fiscal cushion to increase spending in things like infrastructure packages or training and education.

Traditionally bond investors have focused on valuation models but more recently, political uncertainty has played an increasing role in short and longer-term volatility. Though our focus is on the long term, there is merit in trying to gauge the difference between short- and long-term spread widening resulting from political and geopolitical volatility. The recent election results in India highlight the importance of factoring sentiment indicators into an economic analysis, as domestic perceptions of corruption have improved while Indian GDP has undershot market expectations. Modi’s landslide victory also raises the question of how long these cyclical shifts toward populism will last. Therefore, adept investors should leverage hard and soft indicators to anticipate or better understand these shifts and the potential changes in legislative representation and policymaking.


Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The World Bank provides financial and technical assistance to developing countries around the world. Established in 1944, it is based in Washington, DC.

The International Labour Organization (ILO) is a United Nations agency whose mandate is to advance social justice and promote decent work by setting international labour standards

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.


Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.