John-Paul Smith won’t give up on his bearish bet against developing nations.
The founder of research firm Ecstrat Ltd., renowned for his early warning of Russia’s equity-market plunge in 1998 while at Morgan Stanley, is finding plenty of places to direct his pessimism. Among his latest concerns: authoritarian regimes in China and Russia as well as governments in Thailand, Turkey and the Philippines shifting in that direction.
Smith’s caution runs counter to recent history, in which the world’s autocratic nations have rewarded bond traders with larger returns than democratic countries. While that may be true in the early stages of a regime, he says an authoritarian rule eventually hurts productivity with the value of debt and equity assets taking a hit.
“I’m struggling to identify any attractive bets for emerging markets under authoritarian regimes,” Smith said in an interview from London. “The notion that both sovereign and corporate governance throughout the world will gradually converge towards some supposed liberal norm is now well and truly dead.”
Stocks in particular are adversely affected under authoritarianism because states typically redistribute resources away from minority capital to fit their social and political agenda, according to Smith. He says this could crush the decade-long bets some funds are making on emerging markets. While Smith is bearish across developing-nation stocks, his equity strategy consultancy is less pessimistic on Thailand and the Philippines near-term given their lower exposure to commodity prices, contagion risks with China and moral hazards.
The MSCI’s gauge of developing-nation equities gained 0.1 percent as of 2:12 p.m. in Tokyo on Tuesday, bringing its year-to-date advance to 30 percent.