Strategy Note /

Corruption scores: Irrelevant in the short-term

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    26 January 2020
    Published byTellimer Research

    Transparency International published its annual Corruption Perception Index (on 23 January). We look through the data and put it into an investment context.

    Least and most corrupt

    Among the "emerging and frontier" market countries (as defined by the likes of MSCI and FTSE on the basis of stock market development, rather than on income levels), Chile, Hong Kong, Iceland, Qatar, Singapore, Taiwan and UAE score in the range of most of the "developed" countries. Some of the countries (with accessible stock markets) with the poorest scores are Bangladesh, Iraq, Lebanon, Mexico, Kenya, Nigeria, Russia and Zimbabwe.

    Biggest changes in the past year

    The most improved scores in the past year are in Argentina, Bahrain, Indonesia, Iraq, Kazakhstan, Kenya, Korea, Malaysia, Mexico, Saudi, Taiwan, Vietnam and Zimbabwe. 

    The biggest deterioration in scores in the past year are in Croatia, Czechia, Georgia, Hungary, Morocco, Nigeria, Pakistan, Philippines, Romania, Rwanda, Turkey and Ukraine. 

    Biggest changes since 2012

    The most improved scores since 2012 are in Argentina, Indonesia, Ivory Coast, Kazakhstan, Pakistan, Saudi, Ukraine, Vietnam and Zimbabwe. 

    The biggest deterioration in scores since 2012 are in Bahrain, Brazil, Hungary, Mexico and Turkey.

    Corruption scores in an investment context 

    Changes in score over a number of years are likely a more reliable indicator than those over a single year. These scores are imperfect and lagging indicators; for example, perhaps only the most partisan critics would deny the improvements in anti-corruption prospects in, for example, Pakistan and Romania, in the past year, contrary to their scores from Transparency International. 

    Corruption is an emotive topic and many in the "developing" world would argue that some of the most egregious corruption would not exist without the welcome given to corrupt capital in the banking, financial and real estate markets of some of the supposedly cleanest countries. 

    Stock market returns, economic growth and civic stability (i.e. an absence of protest disruption) can be very high in countries deemed as corrupt on measures such as this (e.g. China and India, which have consistently scored about 40, on a scale of zero to 100). In our view, stock market returns, growth and stability are more vulnerable to changes in government (or underlying divisions within a deep-state) which prompt a (disruptive) change in the established rules of doing business and public governance.

    Nevertheless, weaker institutional checks and balances in corrupt countries are ultimately reflected in inefficient allocation of capital (rent-seeking), high cost of capital and vulnerability to protests.