Designed for long-term investors
This is a holistic risk tool used to identify top-down and structural challenges.
Experience teaches us that fundamental, research-driven stock picking does not happen in isolation. Countries have weaknesses and vulnerabilities that can influence investment outcomes, so our analysts strive to be clear-eyed and knowledgeable on policy direction, structural vulnerabilities and specific challenges faced by the countries where we invest.
Our Proprietary Database
Our proprietary database covers 110 variables for 70 countries. This provides the backbone of our Country Risk Framework, providing the data which drives our investment outlook ratings. The coverage of 70 countries is determined by our investment universe. These countries are the constituents of the most widely used indices, namely MSCI World, MSCI EM and MSCI Frontier. The data covers easily Quantifiable subjects, such as Macroeconomics and what could be more usefully described as Contextual, such as demographics and geopolitics.
Processing the inputs
The investment outlook is built on quantifiable data but viewed through the lens of contextual inputs. The data that we consider Quantifiable builds a picture of the practical constraints, vulnerabilities and institutional readiness of a country. This is where reforms tend to have the largest impact and where the immediate concerns tend to reside.
Under Contextual, we consider all those inputs that form the prism through which the quantifiable data should be viewed, to accurately assess the investment outlook for a country.
Sovereign financials
- Macro vulnerabilities
- Growth, inflation, rates, spreads
- FX, Ratings outlooks
Government institutions
- Institutional stability
- Regulatory quality
- Rule of law
- Ease of doing business
- Public sector corruption
- Banking supervision
ESG and climate change exposures
- Country ESG score
- Air & water quality
- CO2 emissions
Demographics
- Population growth, median age
- Urbanisation growth
- Educational attainment
- Gender imbalance
- Female worker participation
- Human Capital index
- Intergenerational mobility
Geopolitics
- Geo-economical security
- Military capability
- Diplomatic power
- Economic diversity
- Resource security
- Diversity of trade links
Serves as a framework for long-term, bottom up investors.
Investment outlook
The Country Risk Framework is designed to build five-year investment outlook ratings for investors, to guide for policy expectations, help identify vulnerabilities and identify the range of possible outcomes for fundamental, research-driven stock pickers.
Considering all the data points for each section, an overall assessment is made.
Scoring system
For simplicity a score of 1 3 is used indicate positioning on each segment
| Scoring | Points |
|---|---|
| Black | 1 |
| Grey | 2 |
| Green | 3 |
Output
Structural assessment by country summarised in points
| | | Risk Score | | | 5 year outlook | |
|---|---|---|---|---|---|---|---|
| Germany | 8 | Positive | |||||
| Australia | 8 | Neutral | |||||
| UK | 7 | Negative | |||||
| US | 6 | Neutral | |||||
| China | 6 | Neutral | |||||
| Brazil | 5 | Positive |
Investment outlook is focused on 5 years; commentary highlights key signposts
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 September 2020.
Country snapshot
| Germany | Evaluation | Risk score | |||
|---|---|---|---|---|---|
| Sovereign Financials | Strong sovereign financials | | ||
| Government institutions | Strong institutions | | ||
| ESG & Climate change exposure | ESG ranking neutral | | ||
| Demographics | Negative demographics | | ||
| Geopolitics | Policymaking still underplays geopolitical weight | | ||
| Commentary | Positive Trajectory | ||||
| Next Federal elections are in September 2021. Berlin's successful track record on COVID-19 and its economic challenges underpins the stability of the governing coalition. The historic commitment to balanced budgets has been dropped in favour of Euro 1 trn in state aid and guarantees, underpinning confidence in the country. Leadership of EU policymaking has been effective, not least via the EU Recovery Fund launch. Will gradually build up the country's geopolitical leadership from here, in spite of short term challenges from Russia, the US and China | POSITIVE | 8 | |||
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 September 2020.
| Australia | Evaluation | Risk score | |||
|---|---|---|---|---|---|
| Sovereign Financials | Sound sovereign financials | | ||
| Government institutions | Strong institutions | | ||
| ESG & Climate change exposure | ESG Ranking strengthening | | ||
| Demographics | Positive demographics | | ||
| Geopolitics | Challenged geopolitics in the short-term | | ||
| Commentary | Neutral Trajectory | ||||
| One of the few countries left with AAA rated debt, Australia has managed COVID-19 relatively well and support for the economy has been effective, augmented by enabling drawdowns on superannuation funds where required. The country's economic vulnerability lies in the relationship with China. In an escalating conflict between the US and China, Canberra has committed to the US, in spite of the significant economic dependency on China. Ratings agencies and investors are focused on this and the country's vulnerability to the impacts of climate change, although policy direction seems to be improving. | NEUTRAL | 8 | |||
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 September 2020.
| UK | Evaluation | Risk score | |||
|---|---|---|---|---|---|
| Sovereign Financials | Deteriorating sovereign financials | | ||
| Government institutions | Strong institutions | | ||
| ESG & Climate change exposure | ESG Ranking Neutral | | ||
| Demographics | Neutral demographics | | ||
| Geopolitics | Policymaking erratic | | ||
| Commentary | Negative Trajectory | ||||
| An unsuccessful struggle with COVID-19 and erratic announcements on policy and on Brexit negotiations have rapidly eroded the government's domestic approval ratings and its credibility in the EU and abroad. This slippage represents a significant challenge to the economy and to social cohesion. Investors face a long period of uncertainty around tax policy, trade (48% of UK exports went to EU in 2019), equivalence of rules and the shape of the future relationship between the EU and the UK. Meanwhile, the pandemic is not under control and the Bank of England believes UK banks are not ready for negative interest rates. The window to resolve most of these issues is open, but inexorably closing. | NEGATIVE | 7 | |||
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 September 2020.
| US | Evaluation | Risk score | |||
|---|---|---|---|---|---|
| Sovereign Financials | Deteriorating sovereign financials | | ||
| Government institutions | Strong institutions | | ||
| ESG & Climate change exposure | ESG Ranking negative | | ||
| Demographics | Neutral demographics | | ||
| Geopolitics | Policymaking erratic | | ||
| Commentary | Neutral Trajectory | ||||
| With the next elections set to be highly contentious, investors must face a period of prolonged uncertainty. The country's unsuccessful track record on COVID-19 and its policymaking gridlock ahead of the elections may raise the economic cost. The outlook scenarios are extremely polarised, depending on the eventual winners in the Senate and Congress. The historic GOP commitment to fiscal rectitude has been diluted and it seems that debt will continue to grow regardless of politics. Binary outcomes are expected in the country's geopolitical leadership from here, with significant challenges from China and Russia. | NEUTRAL | 6 | |||
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 September 2020.
| China | Evaluation | Risk score | |||
|---|---|---|---|---|---|
| Sovereign Financials | Sound sovereign financials | | ||
| Government institutions | Institutional reforms ongoing | | ||
| ESG & Climate change exposure | ESG ranking strengthening | | ||
| Demographics | Neutral demographics | | ||
| Geopolitics | Policymaking strong and focused on sustainable growth | | ||
| Commentary | Neutral Trajectory | ||||
| The country's post-COVID-19 aggressive diplomacy (the ‘Wolf Warrior’ approach) has backfired. China will use its economic and political resources to take advantage of the deglobalisation campaign of the US. A shift toward high-tech industries, supported by subsidies, will drive economic growth, although ammo will be used sparingly. Expect continued strengthening of security measures and renewed outreach via Belt & Road Initiative. | NEUTRAL | 6 | |||
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 September 2020.
| Brazil | Evaluation | Risk score | |||
|---|---|---|---|---|---|
| Sovereign Financials | Manageable sovereign financials | | ||
| Government institutions | Institutional reforms ongoing | | ||
| ESG & Climate change exposure | ESG ranking weakening | | ||
| Demographics | Neutral demographics | | ||
| Geopolitics | Policy making strong except for healthcare security | | ||
| Commentary | Positive Trajectory | ||||
| Expectations were higher after pension reform. COVID-19 represents a significant challenge to the economy and to social cohesion. The government's disjointed and conflictive approach has damaged credibility and put Brasilia behind schedule. However, the healthcare service will eventually gain control over the pandemic. Meanwhile, inflation and rates are at historic lows, boosting domestic investment in equity. With sound economic management, the country will bounce back and the window for tax reform remains open until 2022. | POSITIVE | 5 | |||
Past performance is not a guide to future returns.
Source: Martin Currie as at 30 June 2020.
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