December 1, 2016 / 4:31 PM / a year ago

SSA investors grapple with political risk strategies

* Investors lose faith in pollsters

* Uncertainty keeps money out of bonds

* Some willing to take plunge

By Michael Turner

LONDON, Dec 1 (IFR) - Public debt investors, trying not to get caught on the wrong side of another shock political result in the West, are using an array of strategies to tackle this new kind of uncertainty.

The Italian referendum on Sunday and France’s presidential elections in the spring of 2017 have intensified investors’ attempts to try to get a gauge on public opinion.

Bondholders were wrong-footed in 2016, when polls wrongly predicted the outcomes of the UK referendum on membership of the European Union and the US elections, catching them off-guard.

“It’s only really three areas available to give an indication,” said Shilen Shah, a bond strategist at Investec Wealth and Investment, “polling data, the betting markets and financial markets, and they’ve all been proven wrong.”

Polls were also wrong in correctly predicting what the outcome of the French centre-right primaries would be, with Francois Fillon, who was in third place, ending up winning.

“The problem is that the results now are so binary and not mainstream,” said Shah. “So there might be a degree of fibbing when people speak to polling companies, even though historically they have been quite accurate.”

Italy banned polls on its impending referendum this week, but in mid-November, Reuters reported that of 32 polls published by 11 different pollsters since Oct 21, every one had the ‘No’ camp ahead, and generally by a widening margin.

In France, Francois Fillon is expected to beat National Front leader Marine Le Pen to the presidency in May, taking 66% of the vote, according to an Elabe poll released on Wednesday.

But investors remain unconvinced.

“The polls don’t really know the outcome,” said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management. “The markets won’t be able to shake the fear that Le Pen has a one-in-four chance of winning.”


Investors are dealing with the sharp rise in uncertainty in different ways.

Shah at Investec Wealth and Investment is taking something of a passive approach in the hope of having enough cash to exploit the aftermath of any results, a technique he deployed during the US presidential election.

“In the US election, we sat on our hands,” he said. “If Clinton had won, it might have meant an emerging markets rally, but the only thing you can do is keep powder dry, with high cash balances to try and take advantage of whatever outcome. Political risk is so binary, it’s much more difficult to predict.”

Dowding at BlueBay, meanwhile, says that his firm is short duration in US, Japanese and UK government debt and long in Bunds, in an attempt to take advantage of any moves from central banks. In France, BlueBay is short OATs.

“I don’t see how the credit spread can go tighter under the risk of Le Pen, but I can see how it would go wider,” said Dowding.


Not everyone is so bearish, with some investors thinking the market is acting too cautiously now after a year of political surprises.

“You have to treat polls sceptically, but it’s our view that after Brexit and the US presidential vote, the markets are actually over-pricing political risk,” said Cosimo Marasciulo, head of European government bonds at Pioneer Investments, pointing to Italian government debt in the run-up to the referendum.

The yield on 10-year BTPs has soared in recent months, from a low of 1.05% on August 11 to a high of 2.167% on November 23, according to Tradeweb. The bonds have rallied since then, and were trading at 2.018% on Thursday afternoon.

“If you look at the widening in Italian BTPs, we think that we will be properly compensated for the risk there,” Marasciulo said.

“Even if there is a No vote in the Italian referendum, it is well flagged and the market is already overshooting, so the effect on BTPs will not be too bad.”

Pioneer Investments has been buying 10-year BTPs.

The asset manager has not started positioning for the French elections yet, but Marasciulo is fairly confident that Fillon will win.

“In France, the [polling results] gap between Le Pen and Fillon is far wider than the outcomes of Brexit and the US presidential election,” he said. “The closer you get to an event, the more investment opportunities there are.”

One thing is almost certain, he will take the plunge and invest ahead of the event rather than react to market moves after the fact.

“Sitting on cash is the path of least resistance, but we are paid for performance,” said Marasciulo. (Reporting by Michael Turner; Editing by Helene Durand and Philip Wright)

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