"Political risk is the hardest of all to handicap", a well-respected analyst told me recently. Many investors largely disregard the political risk factor in emerging markets after the likes of Goldman Sachs successfully propagated the BRICs narrative and the old story of ‘risky' emerging markets and ‘safe' developed markets was (almost) consigned to history.
No-one cares so much about the political risks of instability, corruption and simple bad governance when emerging market government debt is performing well and equity markets are racing ahead. Since emerging markets were the first to bounce back after the crash, there has been plenty of evidence that the party is continuing. China's ascent to second largest global economy underlines the long-term shift of capital and power from the developed world to the developing.
Investors have continued to ignore issues like corruption and political interference (at the highest level) in Russia - as in the case of BP - or threats from censorship in China (a 2009 clampdown censored the websites of many internet-dependent businesses in China that presented no political threat to the government).
Then came Tunisia, Egypt and Libya, not to mention Bahrain and Yemen, which have given the political risk pundits plenty to opine about. Events in those countries disrupted our previous narrative understanding that their politically unpleasant regimes were necessary and the only alternative was al-Qaeda.
Neo-cons have pointed out that these prove that most people's concern is with material prosperity and their own economic prospects. Understanding the political and other factors that underlie developing economies clearly requires a more granular understanding than simply replacing one simple narrative with another.
Recent political revolts have translated into market blips in both developed and emerging market indices as investors fear oil supply shocks. If the oil price is a threat to the global economy, the price of bread often threatens stability - and even investors' capital - in emerging markets. Remember the commodity price riots of 2008?
As Will Hutton argues in ‘The Writing on the Wall: China and the West in the 21st Century', the driving force behind the Tiananmen Square protests was popular disquiet about bread prices. While there were undoubtedly many plucky student demonstrators back then, the bread price narrative was overlooked by western TV crews and has escaped popular understanding.
Biz Stone, the founder of Twitter, told the 2010 Milken Global Conference in Los Angeles that Twitter was being used in Egypt to organise protests. Clearly, if you look in the right places, you will find the information you need to guide your thinking about investment in the less stable parts of the world. The price of bread might be a good metric to start handicapping political risk in emerging markets.