‘Facebook Middle Class’ prompts investor rethink

LONDON -- Middle-class anger at not seeing enough of the fruits of economic growth is growing in developing economies, and that anger is forcing the world’s biggest investors to rethink how they rank emerging markets.

Political risk has always been a fact of life for investors focused on the developing world, but many money managers are now assessing which countries have institutions and governments robust enough to stop the kind of anger boiling over into the chaos seen after the Arab Spring uprisings.

The emergence of what one investor called ‘the Facebook Middle Class’ -- aspirational but frustrated as elites soak up the gains from economic growth -- is creating a potentially explosive environment in key economies such as Brazil and China, they say.

“This middle class is waking up to the fact that the government does not offer you the schools, the roads, healthcare system, the housing that the middle class around the world gets,” said Jorge Mariscal, UBS Wealth Management’s chief investment officer of emerging markets. “It is this phenomenon that is creating enormous amounts of resentment.”

The insurance market is showing clear signs that companies with international operations are becoming more and more anxious about social discontent in particular.

Insurers are seeing a spike in demand from companies looking for policies to cover “soft” political risks -- such as heavy handed policy responses to civil disorder that damage business prospects -- as opposed to hard political risks like war, said Andrew van den Born, executive director at insurance broker Willis.

“We’re seeing growth in soft risks -- income disparity, poverty, food prices,” van den Born. “There’s been an upward trajectory in demand for this product since the Arab Spring.”

Credit insurer Coface, which covers companies against default by their clients, has placed its ratings of Turkey and Venezuela on ‘negative watch’ reflecting “political fragility.” Both have seen civil unrest.

Global managers of stocks and bonds are also growing more aware of the roots and results of such social tension. They see the extent to which it depresses economic growth over time and undercuts long-term returns. Some of them are increasingly looking at which governments are capable of reforming fast enough.

Rapid growth in the developing world has drawn millions out of poverty and created a new middle class, but inequality has simultaneously increased in countries such as China and India, the Organization for Economic Cooperation and Development said in July.

The resulting social tensions threaten to “hamper growth and lead to instability,” the OECD said.

Carl Dahlman, the head of global research at the OECD’s Development Center, warns the rising tensions endanger the flow of foreign investment, jeopardizing economic growth further still.

“When (investors) begin to see social tensions rising you do see a fallback in investment ... There’s a lot of animal spirit in these things,” he told Reuters.

Investors also note that qualitative factors such as institutional or government stability must be taken into account. Quantitative measures of inequality are not enough in isolation.

Not all investors are so gloomy Some argue that this middle class agitation in Turkey, Brazil or Chile should be seen as growing pains associated with a process that is overwhelmingly positive.

Masha Gordon, London-based Head of Emerging Market Equities at PIMCO, argues investors should also be heartened by events in India, where the election of a reform-minded government shows the new middle classes can spur change for the better. -- Reuters
 
source:  Businessworld