Latest / Bloomberg Intelligence / Eurasia Group's Sankaran: Impact of Energy Markets on EM(Audio)

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Eurasia Group's Sankaran: Impact of Energy Markets on EM(Audio) · Bloomberg Intelligence

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  Speaker 1: a Bloomberg Market's Most Influential summit at our World headquarters
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  Speaker 1: in New York. I'm Pam Fox my co host Kathleen Hayes.
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  Speaker 1: Crude oil we've been talking about crew during the day
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  Speaker 1: of oil is surging the most since April on speculation
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  Speaker 1: that OPEC has finally agreed to a cut in production.
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  Speaker 1: I'm here. I want to put this to our next guest,
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  Speaker 1: the relationship between emerging markets and the price of oil.
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  Speaker 1: Karthik Shokaran is the director of Global Strategy at Eurasia Group,
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  Speaker 1: and he is also speaking on a panel here at
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  Speaker 1: the Bloomberg Most Influential. Thank you very much for being
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  Speaker 1: with us. It's great to be here. Thanks for um.
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  Speaker 1: So go ahead. What the links between being an energy
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  Speaker 1: producer being an energy consumer, the price of energy and
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  Speaker 1: what that means for emerging market economy some benefit, some
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  Speaker 1: don't absolutely, I mean, I uh. There are a couple
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  Speaker 1: of important points here that we've been looking at for
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  Speaker 1: some time. One is that obviously there are a significant
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  Speaker 1: number of emerging markets economies that are oil exporters, but
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  Speaker 1: when you GDP weight them, the really important ones are
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  Speaker 1: our importers, UH, China and most obviously increasingly in India's
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  Speaker 1: up there as well. So a very large portion of
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  Speaker 1: the fastest growing part of the world of East Asia
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  Speaker 1: and South Asia basically consists of oil importers. And the
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  Speaker 1: second point that I would make is that this particular
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  Speaker 1: UM dropped in the price of oil is unlike previous
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  Speaker 1: ones insofar as it owes much more very positive supply
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  Speaker 1: shop than a negative demand shop. That makes it very
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  Speaker 1: different from what we saw after two thousand and eight UM.
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  Speaker 1: I think the combination of those two UH is on
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  Speaker 1: balanced positive for most emerging markets, the most important and
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  Speaker 1: influential ones UH in the global economy me but it
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  Speaker 1: creates severe issues for some Venezuela Staudi Arabian Nigeria places
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  Speaker 1: like that they're smaller, but their problems are big. Well.
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  Speaker 1: It's interesting too, when you look at the global economy
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  Speaker 1: and global risks the markets are watching so closely, oil
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  Speaker 1: is still a big one. Even at a time when
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  Speaker 1: UM people are talking about going green and they are
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  Speaker 1: and there's solar oils still can have make a big,
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  Speaker 1: big difference. And because whether an export or importer, you
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  Speaker 1: know that that price following as much as it has
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  Speaker 1: can be a big plus or a big minus yeah,
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  Speaker 1: And I think you know. One of the issues I
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  Speaker 1: think in January and February this year, there are a
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  Speaker 1: number of things happening. In my sense was that at
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  Speaker 1: the time we talked about it is that just some
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  Speaker 1: degree the positive the entirety of the price impact from
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  Speaker 1: the positive supply shock was being interpreted as being entirely
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  Speaker 1: due to negative demand shock. That was probably that's probably wrong.
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  Speaker 1: There are a couple of other specific issues that that
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  Speaker 1: that come up. One is the exposed sure of the
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  Speaker 1: of the bank system, of financial system or broadly to
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  Speaker 1: oil exporters, and this came up in the high yield
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  Speaker 1: market in the United States for instance. UH. There may
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  Speaker 1: be pockets in Canada, but our senses that overall the
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  Speaker 1: exposure of the aggregate United States financial system to this
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  Speaker 1: is UH, it is not is not as big. So
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  Speaker 1: I think the market's kind of gotten on board this message.
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  Speaker 1: Show the very sharp correlation be green oil up being
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  Speaker 1: good for the markets is very very pronounced. The first
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  Speaker 1: quarter that's dissipated to that's dissipated to some degree. I
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  Speaker 1: think what matters from hre on out is um, what
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  Speaker 1: is the the extent to which the US has become
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  Speaker 1: a swing supplier. It's also very important in the markets,
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  Speaker 1: right because if you have prices that are contained in
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  Speaker 1: the level where you have kind of positive demand positive
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  Speaker 1: income effects, the financial shocks associated with some highly leverage
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  Speaker 1: produce sears UH received gradually in an environmental or in
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  Speaker 1: forty and sixty or something like that, that's probably okay.
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  Speaker 1: If you get a much sharper rise or a much
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  Speaker 1: faster rise, you bring the fedback and play UH. Other
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  Speaker 1: center backs back and back and play UH. And if
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  Speaker 1: you get a very sharp drop, I think at this
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  Speaker 1: point it much likely to be more to a more
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  Speaker 1: duty demand shock because the supply shock is already and
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  Speaker 1: so kind of a big range is probably healthiest for
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  Speaker 1: the markets to be mind, that also speaks to the
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  Speaker 1: issue of national security, doesn't it, Because if the United
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  Speaker 1: States ends up being the swing producer as you suggest
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  Speaker 1: in the world's energy markets, then you also have political
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  Speaker 1: interests that are aligned all over the world. And the
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  Speaker 1: reason I mentioned emerging markets at the very beginning and
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  Speaker 1: the link to oil is okay. When you, as an
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  Speaker 1: investor buy into the emerging market theme, a lot of
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  Speaker 1: times you end up buying a lot of stocks where
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  Speaker 1: they're trading in Russia and they're trading in Brazil and
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  Speaker 1: they are resource based stocks. But that may not be
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  Speaker 1: the emerging market that you think of in your head,
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  Speaker 1: because the emerging market that we want to maybe concentrate
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  Speaker 1: on is you know, India, South Asia and other areas.
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  Speaker 1: Tell us about that. But absolutely, I think one of
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  Speaker 1: the it depends a lot on asset class, because if
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  Speaker 1: you buy an e t F and it says emerging
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  Speaker 1: markets on that e t F, it doesn't necessarily mean
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  Speaker 1: that you own what you think. They may own a
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  Speaker 1: big energy company in Brazil and another energy company in Russia. Absolutely,
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  Speaker 1: I'm just to degree that the a market cap waited,
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  Speaker 1: some of these issues have have gone downe but absolute
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  Speaker 1: I think it depends a lot of nasset class. It's
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  Speaker 1: it's particularly true in external debt, which tends to be
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  Speaker 1: very much more resource exporter heavy, uh in part because
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  Speaker 1: those guys had revenues denominating dollars, so they issued in dollars. Um.
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  Speaker 1: The local currency debt market is more evenly balanced, but
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  Speaker 1: you don't have access to all the local currency debt
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  Speaker 1: markets and the equity markets in particular. Um. You know,
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  Speaker 1: there was a Tony, we have problem today. I was
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  Speaker 1: reading the story about Saudi Arabia maybe diving to delay
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  Speaker 1: that bond sale. Maybe this decision or not, the speculation
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  Speaker 1: that the decision of bat Opec, maybe that has something
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  Speaker 1: to do well. I mean, yeah, there's I mean, there's uh,
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  Speaker 1: there's that. There's the you know, there's the Senate bill.
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  Speaker 1: There are many the Senate veto. There are obviously lots
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  Speaker 1: of specific tell people remind people what that is, because
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  Speaker 1: this is I think the first time that the DeVito
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  Speaker 1: has been overwritten. Yeah one um. And essentially it gives
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  Speaker 1: us private us private citizens the ability to just do
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  Speaker 1: um uh you know, Saudi government in courts for um
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  Speaker 1: any part that the court may find. So as you
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  Speaker 1: look out over the world, which emerging markets are looking
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  Speaker 1: best to you? And I guess and and sort of
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  Speaker 1: like what how do you gauge that? What are the
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  Speaker 1: metrics you most look at? We know that when fed
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  Speaker 1: rate hike, expectations go down and to market investors read
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  Speaker 1: a relief. You know, eventually little raise rates even a
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  Speaker 1: little bit. But for you, how are you deciding who
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  Speaker 1: you like and who do you like best? Well? I think, um,
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  Speaker 1: you know, the issues are from a structural point of view,
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  Speaker 1: what you want to see is UM, you know, a
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  Speaker 1: reasonably healthy domestic economy, not a lot of hard currency indebtedness,
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  Speaker 1: of foreign currency indebtedness, a central bank that has enough
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  Speaker 1: credibility to be able to cut rates if you have
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  Speaker 1: a slow down in the economy, and UM a kind
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  Speaker 1: of a positive um you know, you know, a positive
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  Speaker 1: association with with this big energy shock that's happened. So
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  Speaker 1: if you're selling UH consumption goods to Western consumers, you're
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  Speaker 1: probably better off then if you're selling oil to them,
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  Speaker 1: you know that that kind of stuff. Now, within this
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  Speaker 1: you'll have UM specific political risk where some things may
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  Speaker 1: get better and some things may get worse. So in Brazil,
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  Speaker 1: for example, UH, there us a dramatic political shift when
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  Speaker 1: Jimmy Russef got the got impeached, which then contributed to
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  Speaker 1: the markets becoming U much happier. Along the way, the
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  Speaker 1: central bank was able to hold interest rates UH, which
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  Speaker 1: then you know, reduced people's fears that you'd have a
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  Speaker 1: central bank that was hiking rates in the middle of
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  Speaker 1: a third year of recession. So there are a lot
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  Speaker 1: of idiosyncratic political factors that come into place here in
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  Speaker 1: the Turkish case, you had, you had the cool you have,
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  Speaker 1: you have geo political outcomes which kind of in part
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  Speaker 1: offset any positive impetus that Turkey gets from being a
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  Speaker 1: big oil importer. In They on the other hand, you
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  Speaker 1: have a government that still has um some some some
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  Speaker 1: reform impetus. It's an oil importer. And this kind of
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  Speaker 1: a structural story of you know, the best bigger growth
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  Speaker 1: in China, FDI, etcetera. When people make decisions about where
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  Speaker 1: to invest their money in emerging markets, should they take
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  Speaker 1: away from the transfer of power in Brazil as well
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  Speaker 1: as the very has changes in government that we see
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  Speaker 1: all like in India previously, as something that makes those
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  Speaker 1: assets more valuable. I think political wis is enormously important
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  Speaker 1: because or politics more broadly, because effectively, one of the
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  Speaker 1: things you're buying is you're buying governance, You're buying state capacity,
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  Speaker 1: you're buying the coheed, you're buying cohesion and confident. That
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  Speaker 1: maybe why energy produce in the United States is perhaps,
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  Speaker 1: as I said, like a swing producer. It's not a
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  Speaker 1: bad swing producer to have, yeah, exactly. And I think
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  Speaker 1: and it's a producer that's that's where decisions are governed
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  Speaker 1: to a much weighted degree by market forces than by
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  Speaker 1: cartild politics, which also makes it, uh, you know, a
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  Speaker 1: healthier swing producer to have at a centro point of
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  Speaker 1: the global economy. Thanks you so much for joining us,
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  Speaker 1: Director of Global Strategy at your Asia Group based here
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  Speaker 1: in New York. Joining us at the Bloomberg Markets most
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  Speaker 1: Influential summit at our Bloomberg World Headquarters in New York,
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