Recent facts from the emerging markets demand that American corporations conduct a fundamental review of the nature, quality and behaviour of their offshore assets. And stock analysts recommending long positions in American companies with significant overseas income flows need to recognize that the cyclical case for equities is no longer a valid proposition. In brief, economic conditions in Latin America, Asia and Africa are guiding profound political changes which, in turn, are influencing new legislation (as opposed to mere policy statements) governing asset ownership, profit repatriation, production margins and currency controls.

What impact will these legislative changes have on corporations (like GE, C, AIG, BA, COP, CVX and RDS) whose investments in the developing world are critical to their business models? And if there is nothing cyclical about this trend towards socialism-oriented legislation, is a radical shift in the methodology applied to equity valuations overdue today?

Latin America has been leading the charge in redefining the role of American and other foreign capital in domestic economies well into the next decade and beyond. Due primarily to the failure of sixty years of anti-poverty initiatives, Rafael Correa (Ecuador), Evo Morales (Bolivia) and Daniel Ortega (Nicaragua) are now firmly in the Hugo Chavez-Fidel Castro camp, with a few more major Latin American politicians on the fringes. The message from the continent, to anyone who is listening, is fairly straightforward: proceed to implement laws which dramatically curtail the freedom of private capital, particularly foreign capital, to influence the upgrading of national assets and the distribution of profits generated from those assets.

Another perspective on the methodology to be applied to American equity valuations can be obtained from the state of the political risk insurance marketplace. In certain instances, like energy assets in the Gulf of Guinea or off the coast of Somalia, risk insurance is now simply unavailable. In certain other instances, like for a variety of assets located in South Africa and India, political risk insurance coverage can only be obtained on a year-by-year basis, mainly due to concerns that the state of the domestic economies might force new nationalization-type regulation in the foreseeable future. Then there are instances, like Pakistan, Bangladesh, Iraq, Iran, Burma and Zimbabwe, to name just a few examples, where the mere mention of political risk insurance invites nothing but laughter (and scorn) in risk placement dealing rooms. 

It should be pointed out that political risk insurance rates bear, at best, a minimal relationship to credit default swap quotes for emerging market sovereign bond issues. The former are indicators of specific asset (business) risks, while the pricing of the latter usually incorporates only the prospects of a country reneging on its debt service obligations.

Like corporate credit, political risk insurance remains frozen for the moment. But what the political risk marketplace has certainly acknowledged in recent weeks is that political movements firmly rooted in social conditions carry with them the real potential for sweeping constitutional amendments. Unlike in the second half of the 20^th century, when Latin American armed revolts were unable, with the exception of Cuba and Nicaragua, to achieve any level of government control, the modern-day political movements are engaging the electoral process, and winning. How should the new reality influence corporate valuations?

To further complicate emerging market asset valuations, far forward (medium and long term) currency risk-offset providers are hesitant to enter into any fresh commitments unless the crisis in counterparty risk shows signs of resolution; in fact, certain reports suggest that many American corporations are unable to obtain even short-term foreign exchange risk coverage.

The first task is not how to value equities in the changed international environment but whether the changes in that environment are cyclical, or non-cyclical, in nature.