Oct 7, 2019
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.