April, 2016 – From the corruption scandal that rocked Brazilian energy behemoth Petrobras and reached as far as some of the country’s most senior politicians, to the Chinese government’s frequent intervention in its marketplace, there is no doubt that geopolitical risks can substantially impact how overseas investments ultimately fare. At the same time, as the world’s marketplaces and the businesses that operate within them have become increasingly international it is now all but impossible to find a well-balanced investment portfolio without some sort of overseas exposure. Given this reality, The New York Hedge Fund Roundtable recently surveyed its membership about the alternative investment industry’s approach to investing overseas and evaluating the risks inherent in doing so.
Assessing global political risks and opportunities was the topic of the Roundtable’s March meeting, where featured speakers William McCahill, a senior advisor with Veracity Worldwide, and Yael Eisenstat, a managing director with Veracity Worldwide, both weighed in on the topic.
“People need to look beyond the headlines,” Eisenstat told attendees at the March event, noting that media coverage and public perception don’t always give the most accurate picture of a country’s investment prospects. One specific example she pointed to is Nigeria, which has long been widely viewed as being an extremely corrupt country. Meanwhile, even with such very real challenges, she says Nigeria’s current president is making good on his promise to prioritize tackling corruption.
Despite the prominence of the Petrobas scandal and Brazil’s ongoing struggle with its major recession, members of the Roundtable believe there are numerous attractive, long-term investment opportunities within multiple areas of the Brazilian investment landscape. “The alternative investment community has long been aware that taking the time to dig beneath the surface of popular opinion can unearth investment opportunities with the potential for sizeable long-term gains,” said Timothy P. Selby, President of the New York Hedge Fund Roundtable. “And as the investment world becomes increasingly global such deep dive analysis will become more important than ever.”
New York Hedge Fund Roundtable members had the opportunity to weigh in on geopolitical risks and opportunities Roundtable’s most recent event, as well as through an online electronic poll.
*Of the respondents to this survey, 27% were fund managers; 20% were allocators; 7% were risk management or trading; 36% were service providers; and 10% were other industry participants.
Following are some of the key findings of that survey:
- When asked where the greatest overseas investment opportunities lie for alternative investors at the moment, 56% of respondents think that Brazil’s struggles with a major recession have created a ton of attractive long-term opportunities in distressed debt, private equity and even real estate; 30% think that Kyle Bass and Warren Buffet have made a compelling case for shorting the Chinese yuan in anticipation of a banking crisis that is expected to be far more significant than what the U.S. experienced in 2008; 7% think expectations for a collapse of Japan’s banking system make shorting Japanese equities an attractive bet; and another 7% think that Puerto Rico’s struggles to repay its debt, coupled with the inability of its municipalities and public companies to utilize Chapter 9 bankruptcy filings, makes the purchase of heavily distressed bonds in its secondary market a good bet.
- 73% of respondents said that they have a different risk tolerance when considering investments in companies within emerging markets, while 27% said their risk tolerance remains the same whether investing within the U.S. or abroad.
- When asked where they believe the greatest potential geopolitical risks for investors are in 2016, 37% of respondents think it will be the Middle East, due to issues ranging from ISIS to ongoing religious conflict within the region; 30% think it will be cyberspace, because of the increasing sophistication of cyber crime and terrorism and the absence of a geographic limit to their potential reach; 23% think it will be China, because of the meddlesome nature of its government in its marketplace and uncertainty regarding its claims in the East and South China Seas; and 10% think it will be Russia, because of its increasing reliance on military force abroad coupled with its heavy reliance on oil revenue at a time when the commodity has lost significant value.
- 80% of respondents said that the possibility of reputational risk tied to a company’s operation in a country rife with corruption, or where the government is known to be invasive, would be enough to deter them from investing in an otherwise promising company; while 20% believe that a strong company should ultimately be able to rebound from any reputational harm and that such an investment should ultimately pay off.
- Asked whether they routinely consider political risks and the potential ways those could impact a company’s future prospects when investing abroad, 70% of respondents said they consider such risks regardless of where a company is located; 17% said this is something they would only consider in countries where there are existing issues; and 13% said this is something they consider when investing in emerging markets, but not in developed countries such as Europe.
- When asked if they would be willing to look past the longtime perception of widespread corruption in countries such as Nigeria if opportunities arose to invest in companies located there with tremendous growth prospects, 63% said they would not because the mindset of corruption in such places runs too deep for even the most promising businesses to overcome and would make it too hard to sell institutional investors on such investments; 37% said they would because, under the right circumstance, an existing bias towards a specific country can actually create a great opportunity for early adopters.
March’s “bonus” question: Given the ongoing controversy surrounding Donald Trump’s presidential campaign, including the fact that high profile members of the Republican party such as Mitt Romney and John McCain have denounced his candidacy, Roundtable members were asked whether they believe Trump will ultimately win the Republican nomination. 57% of respondents believe that, despite opposition from high profile Republicans, the party will accept Trump’s majority and nominate him as its candidate; while 45% think that, regardless of what kind of lead he may have, there is no way the Republican party will ever allow Trump to be its nominee and that he will ultimately be forced to run as an independent.
About The New York Hedge Fund Roundtable:
The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org
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