The late 1960s saw the US State Department and the CIA ask two university professors to undertake a unique task: to assign probabilities to the potential decisions of country officials ahead of high-level meetings in Washington. The professors already had their models—it was the application that was key.
Success was achieved. It was the dawn of the Behavioral Revolution, and the models were the first methodical and practical effort at geopolitical risk assessment and forecasting, and a unique extension to the literature that sought to systematize and quantify its subject matter.
As our risk models were refined, the metrics expanded, our firm emerged as the first commercial entity to position itself as the principal actor in this burgeoning field.
Print and television appearances came alongside gaining interest in our work by the academicians. Independent back-testing occurred, and the results published in scholarly journals.
Our accuracy was widely acknowledged.
The Iranian Revolution saw a large-scale expropriation of Western assets, making our data and forecasts even more relevant. The International Country Risk Guide (ICRG) offered a way of quantifying the probability of a range of geopolitical risks, from expropriation to social turmoil, capital repatriation, to terrorism. Transnational firms could now plan more effectively, manage their assets more judiciously.
Throughout the 1980s and 1990s the firm grew in stature and clientele. We passed through Black Friday and later aided investors venturing into the then relatively unknown world of emerging markets.
By the mid-90s, our risk data continued to be empirically tested, with remarkable results.
Just two years prior to the Asian financial crisis our metrics were found to be linked to equity returns in emerging markets. Investors could also use our data to construct portfolios that returned 25% annually, with less risk and less volatility.
At the outset of the new millennium, terrorism entered center stage of world affairs. Our risk metrics were able to form an assessment of the likelihood of future extremism not found anywhere else.
Later, our government stability and liquidity ratios helped guide our clients through the Financial Crisis of 2007-08. Our metrics affecting various socioeconomic conditions, internal turmoil, and democratic responsiveness put us ahead of all others, as we warned clients of the Arab Spring months before the first signs of instability in the Middle East reared its head.
By the next decade, our quant-driven data series had been fully incorporated into the mainstream of Artificial Intelligence, machine learning, ESG and impact investing. Our data revealed interesting relationships between and among risk metrics and were successfully integrated into trading and portfolio management systems.
As we now adjust to different realities in the COVID-19 world our work is more significant than ever. The scope of government power, new regulations and mandates, reconfigured trade relations and supply chains, stagflation, and inequality—to name just a few of the challenges facing us—have come to the fore at a rapid pace, challenging the most seasoned investor and business, and presenting untold research opportunities to the academic world.
A 40+ year data series comprising some 300 individual geopolitical risk metrics adjusted daily and updated monthly for 141 developed, emerging, and frontier markets and offshore financial centers.
Over 2 million geopolitical risk data points inform the world’s longest running series. Endless possibilities, elegantly delivered.
Probabilistic regime scenarios over 18-month and 5-year horizons. Independently back-tested for accuracy.
From corruption, to ESG, to conflict and investment risk, granularized data that meets every need.
In late May I was happy to deliver one of the keynote addresses to spring meeting of theCentre international de formation européenne (CIFE) in Nice. Talking about ways to quantify geopolitical risk engendered a lively debate and Q&A sessionafterwards and I was particularly struck by the depth (and nature) of some of the questions asked of me by the students.
Of course, many of those in attendance are at the beginning of their careers and so were interested in knowing how my views of the world have been colored after spending close to thirty years in the geopolitical risk business. I tried to put things into an historical context, drawing on the experiences of both mytime in the field but also in relation to world events during the 20th century and before.
I mentioned in particular that the period from the late 1980s to the terrorists attacks of9-11 were quite unusual in world history (viz., a time of relative peace and prosperity, aka Fukayama's "The End of History") and what we are seeing today with the wars in Ukraine and between Israel and Hamas are not out of the ordinary. By extension, I mentioned that during the Second World War, commerce continued, and people carried on with their lives. Precautions weret aken; risks were managed. We should therefore see the world through the samel ens as those that came before us and see risk not as something to be avoided at all costs, but as a part of our lives, to be embraced and managed.
At the conclusion of the event I was also pleased to present - along with Dr Michel-Henry Bouchet, Emeritus Global Finance Professor at SKEMA Business School – the CIE-PRS Group prize to the students for the best country risk report. The winners conducted avery interesting piece on sustainable tourism in parts of Latin America. We are looking forward to having some of thestudents participate in our summer internship program.
On a similarly pleasant note, that evening a very nice dinner was held for some of the conference participants, with a discussion that moved from the impact of Da Vinci on military warfare to the extent to which the Middle Ages did indeed provide someof the impetus to the blossoming of knowledge and creativity that occurred during the Italian Renaissance. The two hour reunion passed quickly.
Next year, we will be expanding the Nice conference to include some ofPRS' clients, practitioners from Europe especially, and some specialists invarious and more nuanced areas of geopolitical risk (limited recourse financing, cybersecurity, etc.).
On a related note, the academic literature continues to provide considerable fodder for the application of our ICRG data. For example, in an interesting and recently published piece from the National Bureau of EconomicResearch, our ICRG data was used in part to find that, expropriation risk, such as corruption, negatively impacts innovation by reducing R&D expenditure, human capital in R&D, number of patents, scientific publications, and the Economic Complexity Index – a proxy for technical progress. The findings highlight the detrimental effects of expropriation risk on innovation and economic development at the country level.
Furthermore, using an array of our ICRG data, another study in the Working Paper series designed to assess the resilience of emerging markets’ performance across monetary easing and tightening cycles, it was found that macroeconomic and institutional variables were associated with superior functioning. Institutions mattered during difficult times, as well as current account balances, international reserves, and inflation
Here are the links to the articles if anyone is interested:
(https://lnkd.in/eKC2tMRJ);(https://lnkd.in/edMB-3HQ)
Best wishes until the next update.
Mid-January is upon us and PRS is off to a roaring start! Given the building tensions in the Middle East and the continuing conflict in Ukraine, it's not surprising that political risk is on the minds of many. Our clients are asking for data, analyses, and especially forecasts. The latter seems particularly apt as a number of new clients have come to us with concerns about supply chain security. Our scenarios and quasi-Type II forecasts are being read at a quickening pace. Having almost 45 years of geopolitical risk data is obviously helpful!
As I mentioned last year, we were in Montreal at the end of 2023. A range of activities were planned, and I must say every time I return to that city I feel a sense of rejuvenation. I think there's something about the civility of Canadian culture (people actually have conversations with each other), the bilingual and bicultural nature of the city and it's history that make it special to me.
There are some plans in the works to spend a little more time in the Laurentians - a place that was my spring break 'home' for many years when I was younger. I began skiing at three (my Dad was a professional football player in his 20s and, as a sports freak, he was always hauling us to the slopes to enjoy the softer snow, the warming sun, and the French Canadian jest for life). I recall fondly the heavy evening snow storms, the chalet fireplace roaring, and watching the Canadiens on a small black and white TV. And after a break of some years (living in Vancouver for over a decade spoils one when it comes to skiing) the plan to return to the sport is now a priority! Rossignol all the way!
Clients and friends should note that PRS' popular Researchers’ Dataset (RDS) series – containing updates from 2023 – is now available. The RDS series – derived from our ICRG data – continues to yield unique insights in a range of topics that explore the impact of political risk on asset prices, inflation and monetary policy, the economic costs of war, youth unemployment and political stability, and much more. Contact us at custserv@prsgroup.com to acquire about acquisition of the RDS updates.
On this score, we continue to receive considerable demand for Table 3Ba of the RDS, which offers a more granular look at the political risk components of the ICRG, supported by 20 years of monthly data. The series works as an excellent complement to the other data bundles announced this year affecting ESG, corruption, and internal/external conflict. Scores of academic studies have been conducted using these series, providing unique insights in asset volatility, government responses to the pandemic, and many more.
All the best for 2024!