Photo: J.Ligero & I.Barrios. We Remain Positive on Local Currency Emerging Market Debt
Global equities and global bonds made progress in May 2014, with the former outpacing the latter in local currency terms; for the month, the MSCI World index rose 2.34% in total return terms while the JP Morgan Global Government Bond index returned 0.87%. Commodities, which prior to May had performed very robustly, lost some ground as the Dow Jones-UBS Commodity index produced a dollar total return of -2.87%. Nonetheless, returns from the asset class remain well into positive territory for 2014 to date.
Looking forward, we believe that there are three questions that investors have to consider over the remainder of 2014:
How will bonds react to the normalisation of policy in the US?
What will happen in emerging markets as policy is normalised?
Will corporate profits drive equity markets higher?
Bond markets in recent months have presented us with a conundrum – indeed we held an ad-hoc Perspectives meeting in mid-May to discuss the meaningful decline in core government yields. In the US, our expectation is that GDP growth will be in the order of 2.5% this year and that the overall macroeconomic picture is probably stronger than the Q1 GDP data would suggest. All else equal, that should push bond yields higher, particularly if the Fed stops its QE programme later this year.
The outlook for eurozone bond markets is rather more difficult to call; certainly Germany and Spain appear to have positive growth momentum, which should put some upward pressure on yields if that momentum remains in train. By contrast, the growth outlook in countries such as Italy and France remains very subdued, which is likely to keep yields low. The lack of growth in France and Italy is worrying given that debt levels remain elevated at a time when inflation in the eurozone overall is very low (just 0.5% for the year ending May 2014). The ECB has responded by cutting official interest rates to record lows and now charges banks for depositing funds. It has also outlined a new programme of Long Term Refinancing Operations (LTROs) to aid bank lending and has said that it will intensify preparatory work related to outright purchases of asset-backed securities. Whether this policy response will work remains to be seen, but it shows that the ECB is definitely not resigned to a protracted period of low inflation.
In emerging markets, we remain positive on local currency emerging market debt (EMD) in our asset allocation matrix; my colleagues James Waters and Toby Nangle have commented recently on the value offered by EMD, especially for investors seeking absolute levels of yield. However, we maintain a bias against emerging market equities as we are still concerned about the macroeconomic outlook for China (which is a large constituent of the EM equity indices but only a relatively small component of EMD indices). As I have mentioned in previous comments, it is very hard to find examples of credit expansion on the scale seen in China which have not caused policymakers some significant headaches once the bonanza has ended.
Our outlook for equity markets for the remainder of the year is positive; M&A has made a welcome return in recent months, and while this increases the risk of value destruction by company managements in the longer term (e.g. if they overpay or acquire businesses that later prove to be a poor fit), it does provide an important short-term support for stocks, particularly at a time when the Fed is tapering QE. The style rotation over the last few months has been significant, but overall equity markets have been strong and current index levels suggest that investors still have confidence in the outlook for profits. For that reason, we trimmed exposure not only to government debt but also to investment grade credit in late May, as the rally in core yields had left both asset classes looking expensive. We deployed the proceeds into Japanese equities, as the fundamentals here continue to improve while the market has lagged other developed regions over 2014 to date.
Wikimedia CommonsPhoto: böhringer friedrich. Oil on The Rise?
An oil supply shock could be a threat to the markets in mid-2014. A rise in the global price of oil would cut spending and hurt profits. If there is no quick solution, this could be a summer of market discontent.
The sudden and successful advance of Sunni militants from the Islamic State of Iraq and Syria (ISIS) into northern and western Iraq has captured our attention and raised some concern. There is no ignoring the risks to the markets from this rapidly developing situation. The most important bargaining chip — or weapon — in such a situation is a country’s biggest economic asset. For Iraq, that asset is its oil.
Flying back to Boston from Dubai last Friday, I was far from reassured as I thought over the six days I had just spent in the Persian Gulf region. While there, I asked everyone I could about the prospect for upheavals in the flow of oil and political power.
The consensus I heard was that the ISIS fighters have signaled their intention to use oil to further their cause — meaning that the price of oil is likely to rise in the near term. In fact, we’ve already seen evidence of price fluctuations in the spot and futures markets.
In the longer run, any new Iraqi government — whether hostile to the west or not — will eventually need to keep the oil flowing out to keep the money coming in. But in the meantime, even if the rebels fail to take over southeastern Iraq and the oil-exporting terminals on the Persian Gulf, there is still the chance of an escalation in the conflict and a further disruption in the flow of Iraqi oil.
I have consistently held out that the business cycle matters to investors. Rising energy costs would put the forward growth of the US economy directly at risk — especially if those costs rose above 7% or 8% of disposable income. And this could happen in the next couple of months for reasons unrelated to increasing demand.
As I have maintained throughout this business cycle, the United States holds an enviable position among its peers. The eurozone is heavily dependent on both oil from the Middle East and natural gas from Russia, another area of geopolitical concern. Since the Fukushima nuclear disaster in March 2011, Japan has imported nearly 100% of the fossil fuels needed to generate power.
Oil is relatively cheap in the US because domestic production has been rising, though still not enough for independence from imports. The reality remains that an oil price spike would threaten the buying power of US consumers and companies alike. And with 40% of S&P 500 profits coming from international sources, the US equity market’s ability to boost sales and earnings in the coming months could also be at risk.
Right now, I fail to see a quick solution, and so I fear a summer of market discontent might lie ahead.
Wikimedia CommonsPhoto: Dietmar Rabich, rabich.de, CC BY-SA 4.0.. EM Fundamentals Are Not Fixed
Textbook economics holds that free capital mobility is a source of stability, because it allows international investors to diversify risk and pursue the most profitable investment opportunities. Yet real world experience suggests that the vagaries of international capital flows can impart a huge amount of instability. The prime reason for this is that self-fulfilling expectations can get stuck on an explosive path and when they do they have the power to alter the underlying fundamentals big time.
When developed markets (DM) expected returns were very low, due to sluggish growth and easy policy rates as far as the eye can see, investors massively flocked towards emerging markets (EM) space in search of higher returns. This pushed up EM asset prices (including the exchange rate) and led to a massive increase in domestic credit growth in various countries. The flip side of this was widening of current account deficits which international investors only seemed happy to finance. The reason is that expectations of future asset price and exchange rate appreciation tend to feed on themselves because such capital inflows cause an endogenous improvement in domestic balance sheets. The value of private sector assets may well increase more than liabilities and solvency prospects seem better than they really are as the credit boom pushes up growth to unsustainable levels. Any attempt by the central bank to slow down growth may well backfire as higher policy rates only attract more capital inflows. In the textbook model, asset price appreciation is a stabilizing force because at some point valuations will become so unattractive that the inflow will dry up. However, in real life such a valuation ceiling does not exist. Asset prices can embark on an exponential growth path for a pretty long time.
Nevertheless, the imbalances that result from this cannot continue to grow forever. When the party stops, policymakers find out there is no valuation floor for domestic assets either. The increase in expected DM returns which started a year ago caused EM capital inflows to dry up. Once again EM central bankers are then presented with a Catch 22 situation. If they do not tighten monetary policy, the outflow may accelerate as exchange rate depreciations will feed expectations of further future depreciation. This happens because domestic balance sheets now suffer endogenous deterioration. Asset values decline while nominal debt levels remain the same and pessimism about growth and solvency prospects will create its own grim reality. In addition to this, runaway depreciation may also cause a substantial rise in inflation (expectations). If this happens, monetary policy will have to be tighter than in the case of stable expectations for a prolonged period of time to tame the inflation beast. Runaway capital outflows can thus easily trigger a self-fulfilling process that severely damages the underlying fundamentals. Once markets are in panic mode, they need a firm and decisive policy slap in the face to break this negative feedback loop.
Yet, one can very well understand why dealing this blow to markets is difficult because tightening policy is also not particularly attractive in an economy with excessive leverage. After all, higher interest rates as well as the concomitant growth slowdown will also conspire to reduce the solvency of the debtors and force them to stand and deliver. Yet, in the end this is often the least painful option, especially if the central bank acts early to stem the depreciation spiral. History shows that the cumulative rise in policy rates needed to break the depreciation feed-back loop is lower the more pro-active the central bank is in nipping the whole thing in the bud. In that case there is at least a reasonable chance that policy can be tightened relatively gradually which gives domestic agents time to adjust. In the case of runaway depreciation expectations draconic adjustments are forced upon them overnight which causes much bigger and longer lasting economic damage.
The good news is that (at least at the time that I am writing this) EM space seems to have succeeded in bringing about this more benign slow adjustment scenario, which is why we believe that the resolution of EM imbalances will not derail the global recovery. Having said that, the risks clearly lie in the direction of renewed EM market panic which could, for instance, be triggered by an increase in political and social unrest.
Foto cedidaMaarten-Jan Bakkum from ING IM. Improved Growth or Not?
Since March, emerging stock markets have risen by 10%. This rally might indicate an improved growth outlook, and is strong enough for us to re-examine our cautious growth scenario for emerging markets. The average growth level is currently some 5%, slightly more than half the growth in 2010. In our scenario, economic growth in the emerging world will decline further to 4% by the beginning of 2015. The growth slowdown is primarily caused by three factors: the deterioration of the investment climate and competitive position of most emerging economies, the gradual normalisation of monetary policy in the developed world, and the ongoing growth slowdown in China.
The strength of the emerging stock markets over the past few months can be explained by an improvement – or at least the perception of an improvement – in the first two factors, despite the deterioration of the Chinese growth outlook.
The growth potential for most emerging markets has fallen considerably over the past few years, due to a sharp rise in wages and real exchange rates, a greater government role in the economy and an increase in the tax and regulation pressure. Hence the clear deterioration in the competitive position and the investment climate. This negative development has been most clearly visible in Brazil and India. It is the success of the Chinese growth model that has put policymakers on the wrong track. A recovery of growth potential now requires an extensive policy correction, far removed from the interventionist model.
In recent months, there has been growing hope amongst investors that this year’s elections in India, Indonesia and Brazil will be won by pro-reform parties. That would break the negative policy trend in the emerging world and boost the growth outlook. So far, this optimism has only been confirmed by a positive election result in India. For the other two countries, investors are still hoping. It is therefore too soon to assume a new, positive policy trend in the emerging world.
The US has started normalising its monetary policy. Given the reasonable US growth figures, we can assume that the tapering will continue and interest rate increases will start sometime next year. This should exert continuing pressure on capital flows to the emerging world. Nevertheless, there has been a clear revival in the EM carry trade over the past few months. This is primarily due to growing expectations that the European central bank will further relax monetary policy. At this stage, expectations of further steps by the ECB would appear somewhat exaggerated. Capital flows to the emerging world remain vulnerable.
And then there is China. The growth slowdown is continuing. The most recent figures for the Chinese housing market indicate a strong correction. This is exerting further pressure on economic growth and increases the risk of a system crisis. All in all, the prospects for the Chinese economy are starting to look increasingly gloomy. In view of the great importance of Chinese demand for the entire emerging world, this remains the most important reason for not being too enthusiastic about the recent rally in emerging stock markets.
Foto: JeremyOK, Flickr, Creative Commons. Metales raros estratégicos: una nueva oportunidad para el inversor
In times where all major currencies are continuously losing purchasing power, where the perceived inflation rate is much higher than officially published and where interest rates are below inflation rates, many investors are looking for opportunities to protect and preserve their wealth.
Sure, in the past a good mix of bonds, stocks, real estate and cash had been the answer. But is this strategy still successful today? And can it protect your wealth in the future? If we take a closer look at the global markets, we will find that the yield of AAA bonds is approximately zero, the future of the Euro and the Dollar continues to be highly unpredictable and speculation in established markets like top tier real estate or major stock indices has reached its climax. So, where should investors put their money to diversify risk, maintain wealth and receive solid returns?
A part of the solution could be found in a ‘new’ asset class: Rare Strategic Metals. New because until recently these specialty metals were only accessible to the industry and were solely traded in metric tons. Until today, these metals are not traded on stock exchanges and there is no future or certificate market. However, a handful of companies have begun to offer private and institutional investors access to this market by buying, storing and reselling these metals in lower quantities for their customers.
But what are Rare Strategic Metals and why are they so special?
Metals are considered the mother of all material property. Rare strategic metals in particular are absolutely indispensable to technology and manufacturing today and in the future – which is what gives them their high value. Going mostly unnoticed, few people understand how different our lives would be without these metals. Just try to imagine a world without transportation, computers, cell phones, or even the clothing you are currently wearing, to name just a few examples. National Geographic in June 2011 called them “the secret ingredients of almost everything”, the European Commission and the U.S. Government have already warned several times about the imminent shortages of supply and their critical impact on modern high technology industries.
Already experiencing a rise in prices and supply shortfalls to meet production demands, the continued growth of emerging economic powers such as the BRIC countries is straining the supply of these crucial metals even more. As a result, prices of several rare strategic metals have already risen 50 to 80 percent in recent years.
Market scarcity, supply shortages, and the current turmoil in global financial markets will inevitably cause a further spike in metal prices. History has repeatedly shown that possession of physical metals has led people to prosperity and security over generations. This will not change in the future.
Christian Buescher is Executive Director within the Swiss Metal Group, responsible for developing the Latin American markets.
Whether you call it soccer or football, the “beautiful game” can be a great analogy for long-term investing. With all eyes glued to this summer’s tournament in Brazil, let’s take a look at how investing may have more in common with the world’s most popular sport than you might realize.
For instance, take a scenario where one team scores a goal and is winning 1 – 0 early in the first half. If you were the coach of that team, would you instruct your players to drop back and play defense to protect the lead?
It would probably be a little too early to employ that strategy in the first half, knowing that you would face constant pressure from the opposing team for the remainder of the game.
Instead, you would likely continue to play your style of game; you would continue to attack in order to keep the opposing team off-balance and increase your chances of winning.
Well, the same concept holds true for investing. In the scenario above, dropping back and playing defense with so much time left in the game might translate into investing heavily in fixed income.
You may be tempted to play it safe, with fixed-income investments, but with interest rates at historical lows, this may not be the best way to go. Depending on your financial situation, you and your financial advisor may want to consider allocating some of your investments into equities to create a balanced mix of asset classes that may help you manage risk and reduce the overall volatility in your portfolio. This could provide you with the offense you need to ensure that you are still in the game, so to speak.
Naturally, your coaching strategy may evolve as the match progresses, to keep up with the ebb and flow of the game. Protecting a 1 – 0 lead in the first half is much different than protecting a 1 – 0 lead with five minutes left to play. The same holds true for investing.
Your financial advisor will take your financial goals, time horizon, and risk tolerance into account and determine how best to diversify among stocks, bonds, and money market securities to develop a sound asset allocation plan.
Please keep in mind that no investment strategy can guarantee a profit or protect against a loss. Also keep in mind that all investments carry a certain amount of risk, including the possible loss of the principal amount invested.
Opinion column by Victor M. Mendez, Marketing Manager, Global Retail Marketing at MFS
There was little doubt that the European Central Bank (ECB) would act at its June meeting – market consensus had expected some move on interest rates. The ECB duly delivered on rates but also unveiled a raft of additional measures.
For its part, the ECB had already indicated that it was concerned by the anaemic rate of economic growth in the eurozone, something not helped by a strong euro hampering exports and a low rate of inflation raising deflationary fears.
What we got was a credible package of measures that should nudge growth in the eurozone up a gear. The cut in the refinancing (repo) rate by 10 basis points to 0.15% is likely to have negligible effect, the cut to a negative deposit rate of -0.10% however is more convincing as it should encourage banks to lend more.
More interesting is the Targeted Longer-Term Refinancing Operation (TLTRO), which is being targeted at the real economy, i.e. businesses rather than housing or governments. Liquidity will also be boosted by the cancellation of the weekly securities market programme drain, which should inject approximately €165 billion into the system. Other measures include an extension of the fixed rate full allotment regime and progress towards buying asset backed securities.
This was an enterprise-friendly set of measures. However, the cut in rates may not go down too well with German households, which tend to hold a lot of money on deposit and will shortly be getting next to nothing in terms of interest. The sop to Germany is that a lower euro – which has fallen recently in expectation of the ECB announcements – should support Germany’s exporters. Germans will also take some comfort from Draghi stressing the need for structural reforms to continue given that progress has been uneven and is far from complete. Monetary policy alone cannot do all the heavy lifting in growing the economy.
The real risk, in my view, is that growth will remain low due to demographics and general caution. This will lead to tax receipts recovering but not enough to start repaying significant amounts of loans outstanding. However, the cost of financing that debt is now considerably lower in all countries and the cut in rates should help anchor bond yields and financing costs at low levels.
The measures taken by the ECB are helpful but as the saying goes: “you can lead a horse to water, but you can’t make it drink.” It remains to be seen whether this carrot and stick approach by the ECB can encourage lending and lift the pace of recovery within the eurozone. What is clear is that the president of the ECB, Mario Draghi, is more than willing to engage in further action if necessary, stating that they “are not finished here” if the eurozone economy fails to respond to this latest package.
By Tim Stevenson, manager of the Henderson Horizon Pan European Fund
CC-BY-SA-2.0, FlickrFoto: Maria Jose Bustamante. Chile, nubarrones a la vista
Chile is one of Latin America’s great long-term success stories, with fiscal rectitude and the strong savings culture, fostered by its pension fund industry, often cited as the roots of its success. In recent years though, it has underperformed most emerging markets including Brazil; its currency has proven vulnerable, and the stock of private sector debt has mounted. However, the country is undergoing some profound changes under the leadership of newly elected president Michelle Bachelet.
The changes reflect the nearly universal desire in Latin America to deal with the long-term issues of low public investment in infrastructure, sub-par education, and lack of social mobility. While dealing with these issues could help Chile break free from its ‘stuck in the middle’ status, it seems that few companies are prepared for the changes this will entail, and far fewer still, are able or willing to embrace the president’s vision.
Chile’s economy is slowing down rapidly as the spectre of tax and regulatory reforms from the new, more populist, Bachelet government have spooked corporations, both big and small. Chilean companies pay little tax on corporate profits provided they invest in practically anything; be it foreign acquisitions, company cars, groceries for employees or new plants — eventually it all counts as capital investment. This has led to widespread abuse and severe distortions in the economy, and a severe shortfall in tax revenue for the government. Reform means Chile could grow as little as 2.5% in 2014, which is well below its historic growth rate of 5‑6%. We feel this is a very similar situation to the impact that tax changes have had in Mexico but with perhaps more intense social repercussions.
The slowing economy should drive Chile’s interest rates lower; the central bank cut the policy rate from 4.5% to 4.0% in the first quarter. However, the differential in policy rates between Chile and Brazil has contributed to the peso’s 7.0% underperformance versus the Brazilian real in the last 12 months. Chile’s currency could be vulnerable as more rate cuts look likely in 2014.
Many companies are experiencing headwinds from areas as diverse as environmental protection, data protection, insurance/financial sales practices, and labour relations. Chile’s traditionally pro-business regulatory bodies are being transformed rapidly into much more progressive, proactive bodies. There is an unreal sense of denial amongst Chilean executives.
Meanwhile commodity markets are not particularly helpful for Chile. According to Deutsche Bank, the demand‑led commodity markets of 2002-08 have given way to the supply‑led markets of today. Only where supply is likely to be disrupted — as in the cases of nickel, coffee or platinum — is there likely to be much strength. Producers have excess capacity otherwise to provide rapid supply responses. Chile’s key commodity exports, copper and pulp, have been trendless but it is worth noting that Chile’s producers are generally right at the bottom of the cost curve.
To summarise, the new Bachelet government intends to use higher corporate taxation, stronger environmental protection, vigilance in consumer protection, and vastly higher spending on secondary and higher education to rebalance Chile’s unequal society. Few Chilean companies will see any immediate benefits — it will be particularly important to figure out which companies are getting ‘on side’. For example our research indicates that in Brazil companies such as Cielo and Smiles help the tax authorities with data collection, while Kroton is a beneficiary of big spending on education.
Opinion column by Chris Palmer, Director of Global Emerging Markets at Henderson Global Investors
The markets have continued to trade Argentine bonds with caution, ahead of the Supreme Court audience on the Argentina-Holdout case, which will take place on June 12th. We view the possible outcomes as follows: (1) The Supreme Court accepts the petition to hear the case, perhaps reacting to the plethora of amicus curiae that have been presented in favor of the Republic’s case (great scenario for markets), (2) The Supreme Court asks to hear the input of the solicitor general on the possible implications of this case on the sovereign immunities act before making a final decision, an outcome that could stretch the decision timeframe out to 2015 (good for markets), or (3) The Supreme Court just denies the request to hear the case, in that manner exhausting all the possible appeals of Argentina in the US Court system (very bad scenario). If Scenario 3 occurs, the payment of the interest on the 2033 Discounts, scheduled to take place on June 30, would feasibly be attachable by the holdouts. In other words, under the third scenario, Argentina would most likely default on performing debt.
We will not attempt to forecast how the Supreme Court will act, but rather assume an equal weighting to the just-mentioned possible scenarios. Nine months ago we would have assigned 0% probability to the scenario of the Argentine government agreeing to pay full claim to the holdouts in the event of an adverse Supreme Court decision. Now we see an increased probability of the government potentially deciding to pay the holdouts, most likely in kind (paid with additional bonds rather than cash), as was the case with Repsol. As we argued in our “Winds of Change” piece at the beginning of this year, the authorities have clearly internalized that a recovery in the capital account is a necessity for the current economic model to survive, hence their decision to become increasingly pragmatic on the economic management front.
There seems to be an understanding by the authorities that running a current account surplus is not sufficient to keep money demand strong, and that without external financing, the reserve drain will continue (the reason the government elected to pay Repsol and reach an agreement with the Paris Club is tied to the need to reopen external credit lines). Alternatively, if the US justice system forces Argentina to default, the government may decide to call a debt swap for holders of performing debt, so that investors can receive “mirror” bonds carrying Buenos Aires legislation –and in that manner be able to get paid. The problem with this scenario is that the execution of this strategy seems quite complicated from a logistical point of view, and also, the capacity of provinces and corporates to issue in the future under New York law could be compromised.
The bottom-line: While it is impossible to forecast how the US Supreme Court will ultimately act, our conviction view asserts that the interest of a very small minority places at high risk the right of “the many” (in this case 93% of the holders of debt) to get paid under New York jurisdiction. In any case, we continue to recommend investors stay involved in this credit through sovereign USD-denominated Buenos Aires law paper (2015s and the new 2024s, currently yielding an attractive 10.7%) and NY Law provincial debt (BA 2015s and 2021s, for example). We are not lawyers, but our view is that provincial debt should remain immune to the events affecting the sovereign.
Clearly, if the Supreme Court rejects the case, and Argentina’s ability to make the interest payments on the NY Law 2033s is withheld, there will be ample volatility, but we sense that the willingness of the Fernandez de Kirchner administration to continue paying the debt will remain intact. The amortization schedule of Argentina is relatively light (USD $8.3 billion of public debt matures in 2014, according to the official September 2013 Public Debt Update), and Argentina will probably benefit from increased sources of capital account financing following the agreements reached with the World Bank, the Paris Club, and Repsol.
Now, if Argentina loses the case, but subsequently acts pragmatically, i.e. pays the holdouts to keep interest payments from being attached by the plaintiffs, then we think that the holders of performing debt will refrain from suing the Republic (for violating the most favored offer clause included in the 2005 and 2010 covenants). We maintain this view not least because a decision by the Republic of Argentina to finally end the holdout debacle would likely generate a material, unprecedented rally in Argentine debt given the implied capacity of Argentina to be able to issue without problems in New York. Under this “good case” scenario, we would not be surprised to see the NY-law USD-denominated 2033s rally north of $115 (clean price, now trading at $78) if indeed the government is able to clear the problem with the holdouts.
Alberto J. Bernal-León is Head of Research and partner at Bulltick
The massive election process in India has just drawn to a close. Over 814 million voters were eligible to vote in the nine-phase election, which took place over five weeks, between early April and mid-May. As a point of comparison, the voter turnout is more than twice the U.S. population and larger than the population of Europe.
Let’s marvel at the management behind the world’s biggest democratic election exercise.
How expansive was the polling station network?
Given the premise that no one should have to travel a long distance to vote and no single polling station should manage more than 1,500 votes, India established over a million polling stations.
Why do elections take such a long time?
This is mainly due to the massive scale required in managing such an extensive exercise, including the deployment of more than 200,000 security personnel to facilitate peaceful elections. Mobile security units are ferried across locations as the election phases progress, ensuring the sanctity of the process.
How are all the votes counted?
To me, this is one of the most fascinating aspects of the election process. Although more than 350 million Indians still live in poverty, ballots have been cast electronically, rather than by paper, since 2004. In fact, electronic voting had been tested in local Indian elections for more than 20 years before it was rolled out nationally. Electronic Voting Machines (EVMs) were designed as a technological solution to count large-scale voting accurately and transparently. Close to 2 million machines were estimated to have been used in this year’s election. This has been an improvement from the older system of paper ballots that were rubber stamped.
The EVMs are specialized adding machines that feature the names and symbols of candidates or political parties (symbols are required due to the significantly high percentage of illiterate constituents). Software is hard-wired into the mechanism’s microprocessor so that it cannot be reprogrammed. Each machine is programmed to record just one vote every five seconds, hold a maximum of 3,840 votes and automatically shut down should it detect any tampering. Additionally, machines are deliberately not networked to limit opportunities for further tampering on a mass scale, i.e. thousands of machines must be fiddled at a time to alter the results in a meaningful way. EVMs run on a single 6-volt alkaline battery so they can be operated in rural areas where more than 68% of Indians live. Finally, these machines cost less than US$200 each and are small enough for officials to carry in briefcases.
India is a land of contradictory possibilities. Despite being a poor country with annual GDP per capita on the lower end of Asian economies (at US$1,527), it is home to some of the world’s best IT and generic pharmaceutical companies. Electronic voting is one illustration of the dichotomies that are present in the rapidly changing nation. The management of the country’s large, complex democratic election sparked the need for innovation and India has produced a cost-effective, fair and transparent system that can perhaps benefit other parts of the world. Despite the big macro and microeconomic challenges India may face, this is the kind of product and process innovation that keeps us excited about the potential India holds overall.
Rahul Gupta, Senior Research Analyst at Matthews Asia
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
