Monthly Investment and Research Commentary – June 2015

Country Ranking

  • Magni Research upgraded Australia for meaningful improvements to its Market Integrity (see below).
  • Australia has achieved top rank across all countries in the developed and emerging markets, though several countries in the developed markets have Magni Country Scores very close to Australia.
  • In the past year the scores of South Korea, Japan, Spain and Philippines have risen the most, while the scores of United States, Canada, United Kingdom, Colombia, Hong Kong, India, New Zealand, and Ireland have decreased. Over time Magni Countries Scores generally increase, though countries do experience temporary setbacks.

Japan Intends to Strengthen Corporate Governance

  • Japan recently introduced its first corporate governance code in order to encourage more transparency and economic. By improving the image of corporate Japan, its markets should be more attractive to foreign capital. Following the European model, the code gives companies the option to comply with its rules or explain why they did not. The code includes appointing two independent directors and justifying any cross-shareholdings. Independent directors are a good governance practice and tend to instill Board discipline. Reducing shares held for relationship purposes will free up capital for better uses, while increasing focus on growing shareholder value. The Magni Country Score for Japan places it as one of the lower ranked countries in the development market and successfully implementing this small, but important effort would modestly improve their score. Abe would need success in implementing additional initiatives to strengthen Japan’s economic infrastructure in order to achieve meaningful increases in its relative rank.

Indonesia Reforms

  • With his biggest reforms making little headway, recently elected President Widodo has turned to smaller-measures in an effort to revive economic growth. One initiative has the government allocating a portion of its 2016 budget to state-run banks in exchange for them cutting interest rates on small business loans. Also, fuel subsidy reform has given the government greater fiscal capacity for infrastructure development. However, Indonesia’s reliance on oil imports means that a significant rise in oil prices would place this reform at risk. To help facilitate infrastructure development regulations have been issued easing land acquisitions and encouraging public-private partnerships. The Indonesian economy is expected to grow no more than 5.4 percent during this year; well below the 7% target. Furthermore, with inflation above 7 percent and a rupiah that’s fallen against the dollar there is little room for monetary easing. With a Magni Country Score which places the country in the middle of the countries in the emerging markets, the smaller measures may provide some incremental improvements to the country’s relative rank, though more fundamental economic reforms will be required for a meaningful change in Magni Country Score and hence its relative rank.

Turkey Elections

  • Recent parliamentary elections in Turkey were largely seen as a referendum on plans to increase the power of the currently-figurehead presidency by amending their constitution. Such changes would strengthen President Erdogan and his political party’s hold on the government. In a major upset the elections failed to produce the two-thirds majority Erdogan wanted, thus preventing his party from changing the constitution and handing him greater power. Instead, the party lost its majority, though they are still the largest party and will have the opportunity to form a coalition government. Memories of past weak coalition governments and subsequent financial instability as well as the prospect for continuing wrangling over the formation of a government have weighed on the Turkish market and lira. While these events are creating near-term headwinds for the Turkish market, the Magni Country Score for Turkey is unchanged.

Australian Strengthens AML

A prior assessment of Australia’s abilities to prevent anti-money laundering and combat the financing of terrorism (AML/CFT) found serious deficiencies. Australia subsequently declared its intention to strengthen its adherence to international standards. Magni recently reviewed Australia’s progress in implementing these intentions. The review confirmed significant progress, though a few deficiencies remain. For example, Australia has not made many businesses outside of financial services subject to AML/CTF requirements and these businesses have an insufficient understanding of the risks that their lack of adherence creates. Real estate agents and lawyers, in particular, are at risk for money laundering and terrorist financing activities. Magni uses AML/CFT as part of measuring its Economic Standard called Market Integrity. Countries which have strong Market Integrity are easier and safer places for companies to do business. This upgrade is meaningful for Australia’s Country Score. At the moment, Australia is the top ranked country in the world, though some northern European countries are nipping at their heels.