As populists seem to sweep to power everywhere, one very important issue for the global economy seems to be ignored: that of corruption. A lot of talk in the election campaigns has been devoted to immigration and job stealing, and not enough to corruption and conflicts of interest.
In its latest report, anti-corruption organization Transparency International warns that populists, while able to exploit ordinary people's views that the "system" is corrupt and present themselves as "the only way out," usually fail to fight corruption; often, they make it even worse.
"By and large, anti-establishment parties fail miserably to address -- and often significantly increase -- the very corruption they set out to get rid of," one of the organization's analysts wrote.
For investors, deepening corruption is a big problem over the long term because it creates an uneven playing field and a lot of uncertainty. Plus, in a corrupt environment it is very difficult to value investments. Besides analyzing parameters such as profitability and valuation ratios, investors also must take into account various unknown and often dubious factors, such as which vested interest groups would benefit from what changes in legislation and regulations.
However, as depressing as this may sound, for savvy investors the rise of corruption and populism in developed countries might present an opportunity to make some money in emerging and frontier countries.
Developing countries' assets usually trade at a discount precisely because they are seen by investors as subject to corruption; therefore, their value is viewed as more uncertain than assets in developed countries. If anti-corruption standards weaken in developed countries, the premium that investors are willing to pay to invest in them might diminish, and part of that money could go to emerging markets.
Some emerging markets have made great efforts to stamp out corruption by prosecuting politicians and public officials, as has been the case in Argentina, Brazil and Romania. Of course, this does not mean they no longer have problems, but being seen as doing something to fight corruption may be good for their assets.
For investors who want a quick look at which are the best and worst countries when it comes to corruption, Transparency International has a handy color-coded guide on its website, with the countries in yellow the least corrupt and the ones in bright red the most corrupt.
Looking deeper into the report reveals a good year for Latin America.
"From the Panama Papers in April to the record $3.5 billion Odebrecht settlement in Brazil in December, 2016 was a good year in the fight against corruption in the Americas," Transparency International's report notes.
In the organization's yearly rankings, the lower the score the higher the perceived corruption. A score below 50 indicates that the government is failing to tackle the problem of corruption. Looking at the evolution of scores would be one way for investors to gauge whether an emerging market is moving in the right direction.
In Latin America, taking such a look would indicate that Mexico is going the wrong way, with its score falling by five points to 30 in 2016 from 2015. Brazil edged up by two points to 40 last year, but it is still below 2014's level of 43. Chile fell four points, but it has a score of 66, which indicates that at least the country's government is trying to tackle the issue. Argentina is up four points to 36, while Venezuela stagnated at 17.
Over in Europe, Ukraine recorded a two-point improvement to 29, catching up with Russia which stagnated at 29. Romania advanced two points to 48, on a par with Hungary, which fell to that level by three points. Poland stagnated at 62, while the Czech Republic was down one point to 55 and Slovakia stagnated at 51.
If we look at developed countries in Europe, some of them are doing worse than those still considered emerging. Italy, for instance, scored 47, which was higher than 44 in 2015 but still worse than many Central and Eastern European states.
Over in Asia, "unaccountable governments, lack of oversight, insecurity and shrinking space for civil society" have pushed anti-corruption action to the margins, the anti-corruption organization said.
Still, China improved by three points to 40, the same score as India, which edged up two points compared with 2015.
Improvements also were noted in Afghanistan, which although one of the 10 most corrupt countries in the world improved four points to score 15 last year. Timor-Leste, Laos and Myanmar also continued to improve their scores in 2016, while Cambodia and Thailand worsened.
Of course, Transparency International's index is not a guarantee that a country will be as corrupt as its ranking suggests. Corruption perceptions are highly subjective, and an investor's experience will be paramount to the decision whether to invest. Still, investors could use the rankings as a factor to take into account in their research when investigating where to diversify into emerging markets.