John Grace - What Investors Can Learn From Impeachments in Emerging Markets #4519

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Emerging markets have had their own impeachment episodes in the likes of South Korea, South Africa and Brazil. Amid mounting talk of the potential impeachment of U.S. President Donald Trump, one analyst said investors may want to look abroad to gain insight into the market implications of presidential impeachments. Craig Botham, senior emerging markets economist at U.K. asset manager Schroders, said one problem with studying how markets responded to a presidential impeachment was the lack of data, as the U.S. having seen only one successful impeachment out of four attempts. Wall Street could therefore supplement their research with case studies from emerging markets such as South Korea and Brazil, whose heads of state have been ousted in the past decade. Investors are in a tizzy over what impeachments have historically spelled for Wall Street, after House Democrats opened up an impeachment inquiry against U.S. President Donald Trump. A whistleblower complaint accused Trump of withholding military aid to the Ukraine to pressure it into investigating former Vice President Joe Biden and his son Hunter Biden’s dealings with Ukraine. Yet even a larger data set that encompassed examples in emerging markets did not yield any easy conclusions, said Botham, citing a paper he wrote on the topic in 2017. “In general, there is no direction basically. A priori you cannot say impeachment is going to be good or bad for markets,” said Botham. But he added impeachment could set off prolonged periods of heightened market volatility. In the table below, he shows that major stock-market benchmarks tended to show outsized moves during impeachment proceedings. During the impeachment investigations into Richard Nixon and Bill Clinton, annualized volatility for the S&P 500 (SPX) with historical levels. Botham cautioned, however, that even if impeachment sagas do “make markets more skittish, but it can be hard to disentangle with the events of the day.” For example, impeachment proceedings against Bill Clinton coincided with a surge in volatility in stock and bond markets, overlapping with the Russian debt crisis and the collapse of hedge fund Long-Term Capital Management. It was therefore unclear if the market jitters were sparked by political uncertainty or heightened global economic growth concerns. Another lesson that could be gleaned from previous impeachment proceedings was that the market impact was often tied to expectations of policy change. If a new head of state didn’t break away from past policies, speculation of a looming impeachment was unlikely to spur turbulent trading in markets. “The first question you ask is how likely is impeachment anyway? The second question is what does it change relative to market expectations compared with policy,” said Botham. In Brazil’s case, President Dilma Rousseff’s impeachment was eagerly awaited by investors as her successor, Michel Temer, was considered a more business-friendly candidate who would reform a sclerotic public pension system, and shift the country away from left-wing populist policies that had been blamed for bringing Brazil’s public finances to its knees. Yet in South Korea, market volatility was suppressed during Park Geun Hye’s impeachment in part because there was “less anticipation of a big change in economic policy,” said Botham. As for the U.S., investors may not react much to Trump’s impeachment inquiry as both Republican and Democrats have a mutual desire for a more confrontational approach with China’s trade practices. In the outside chance there was a change of Presidency, Botham said Trump’s successor may pursue a more conciliatory approach to the U.S’s major trading partners, who may share similar grievances against Beijing and may be willing to form a united front against China. “If markets do move on the impeachment talk, people might start to price in a better trade-related outcome for the EU and NAFTA countries,” said Botham.

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