Eurasia Group and Nikko Asset Management partner on emerging markets investment

Eurasia Group and Nikko Asset Management are partnering to bring together Eurasia Group’s proprietary geopolitical risk indicators within Nikko’s multi-asset investment management process. The partnership will offer global investors a risk-controlled means of getting exposure to emerging markets.

“We are experiencing a world of geopolitical creative destruction. With so little lasting cooperation among governments and so many emerging political and economic challenges, the need for an investor roadmap has never been greater,” said Ian Bremmer, president of Eurasia Group. “Investors are more cautious, because they know they lack information. That’s what Eurasia Group and Nikko Asset Management mean to provide. This is a ground-breaking cooperative effort.”

Eurasia Group will provide Nikko Asset Management with a systematic methodology to measure and quantify political risk and its potential impact on emerging market asset prices. This framework includes: (1) country scores that capture current levels of political stability (the Global Political Risk Index), (2) formal assessments of the future outlook for political stability and its impact on the business environment (Political Trajectories), and (3) asset pricing models that estimate the interaction between political risk and market prices.

“Emerging markets represent a compelling investment opportunity for global institutional and retail investors alike,” said David Semaya, executive chairman of Nikko Asset Management. “In working with Eurasia Group, we’re going to be able to quantify important risks related to geopolitics and use that data within our investment portfolios, which will help us maximize the benefits of diversification by avoiding countries beset by crises or those headed in that direction.”

Emerging market and developing economies are set to grow by 4.3% in 2015 and 4.7% in 2016, according to the International Monetary Fund, outpacing growth in advanced economies of 2.4% in both years. Moreover, within emerging markets, the dispersion of market returns has widened considerably since the global financial crisis hit in 2008, suggesting a strong case for attaining exposure through actively managed, multi-asset strategies.

Research from Nikko Asset Management shows that prior to 2008, in an emerging market multi-asset portfolio equally weighted in equities, bonds and currencies, equity would have contributed around 70% of the risk. As a result, a fundamental approach to stock picking was in favor, while investors believed downside risks were manageable. Since the financial crisis, however, bonds and currency have contributed much more to portfolio risk, with both now accounting for as much as 50% with volatility hovering at high levels.

Given the heightened uncertainty around geopolitical risk, a “top-down” macro approach to investing in emerging markets can deliver significantly better results than a more traditional “bottom-up” asset selection process. Analysts from Eurasia Group have worked closely with the multi-asset investment professionals from Nikko Asset Management to ensure that political risk signals from Eurasia Group’s political analysis are systematically incorporated into the investment process.

“We’ve developed a systematic approach to assessing which countries are prone to political shock, using a combination of quantitative and qualitative data,” said Alex Kazan, practice head, emerging markets strategy at Eurasia Group. “Our analysts are evaluating reams of data that is collected on the ground and through open-source methods, yielding unparalleled breadth and depth of actionable information.”

“Asset managers have struggled to effectively incorporate geopolitical risk information in their portfolio management process, partly because of the sheer volume of data that is available,” said Al Clark, global head of multi-asset at Nikko Asset Management. “Eurasia Group’s political risk signals and other assessments give us a proven means of quantifying what has been at best a qualitative input up to now, and we believe this will give us a distinct advantage in managing emerging markets portfolios.”

A White paper setting out their approach can be accessed here.