Do stock markets like bullies?
It’s a small sample size. But it’s about to get larger.
Bolsonaro the bully
Newly minted Brazilian president Jair Bolsonaro just last week joined a small but growing group of world leaders who – if they were on a playground – would be the sandbox bully.
Bolsonaro is an ex-army captain who supports wider gun ownership, accelerated lethal police action and reduced rights for indigenous communities. He has also promised to imprison or ban his political enemies. And he’s said that he’ll enact a “historical cleansing” of the left after taking office. A lot of people have condemned him for misogynistic, homophobic and racists rants.
For a country that is just three decades removed from military dictatorship, it’s strong medicine.
Of course, Bolsonaro was a long time coming. Brazilian politics is still reeling from a series of huge corruption scandals involving the top leadership of a few administrations, namely former president Luiz Inácio Lula da Silva and his successor Dilma Rousseff. Known as the “car wash scandal”, the case has seen Lula imprisoned and Rousseff impeached.
While Lula remains popular, he wasn’t permitted to run in the last election. The Brazilian electorate is highly polarised, and violence between the two sides has occurred both in the run up and aftermath of the election.
Corruption is at an all time high (which is saying something for Brazil). And violent crime is as well. More than three times as many people were murdered in Brazil last year than in the U.S. – which has 100 million more people.
So Bolsonaro is the bully who wants to set it straight.
He’s following a path already outlined on the other side of the world.
Following the Duterte playbook
Philippine President Rodrigo Duterte is also a bully.
As part of his campaign for the presidency, he promised to kill tens of thousands of criminals and end crime within six months. Since he took office in 2016, there are claims that as many as 20,000 suspected criminals have been killed in extra-legal activities.
Duterte even tried to bully former U.S. President Barack Obama while he was still in office, calling him a “son of a whore”. It was an insult he also hurled at Pope Francis shortly after (he’s since apologised). He’s threatened to withdraw the Philippines from the United Nations and has made public jokes about raping and murdering women.
Nevertheless, Duterte is still widely popular in the Philippines. He’s also supported an ongoing economic boom in the country with billions of dollars of spending on infrastructure-related projects.
Markets, though, have been less keen, as shown in the graph below. Since he was elected in June 2016, the iShares MSCI Philippines ETF (NYSE; ticker: EPHE), which broadly tracks the local stock market, is down 20.7 percent in U.S. dollar terms. (Notably, there was a sharp rally in the market before his election.) By comparison, the MSCI Asia ex Japan index has risen 27 percent.
Of course, a country’s president is only one of many inputs into stock market performance. Often, it’s one of the less important ones. It’s usually a lot less important than (say) economic growth and global market sentiment.
For the Philippines, a key contributing factor to its stock market malaise is soaring inflation, which just hit a nine-year high of 6.7 percent in September. That’s one unfortunate result of Duterte’s massive infrastructure programme, which will spend the equivalent of two-thirds of GDP over six years. Interest rates have been rising as a result – which has hurt the stock market.
It’s different for Trump
Back in the U.S., President Donald Trump is a bully too. He’s taken a “Fortress America’” approach to global trade – which included launching a trade war with China… pulling out of trade deals… talking about imposing a tariff on goods imported from Mexico… making it more difficult for Muslims to enter the U.S… and talking about building a wall on the U.S. border with Mexico. He’s also pulled out of the Paris climate agreement.
According to this insider, the same pattern just appeared in a US$29 crypto that could explode as high as 10 times in the coming months.
Trump is also well known for picking fights with anyone who upsets him, from air conditioning companies to civil rights icons to former beauty queens.
He’s (so far) been limited by the foundations of the American constitutional system from taking the kinds of liberties that Duterte has… or which Bolsonaro will likely attempt. But Trump is certainly a bully in the American context.
And markets have, until recently, liked him. The “Trump rally” has extended the longest bull market in U.S. market history. Though the S&P 500 is just up 4 percent in 2018, it’s still up 32.6 percent since Trump was elected in November 2016 (the ETF in the graph below is a proxy for the S&P 500).
And still, policies matter more than people. The big tax cut of the Trump administration – much of which flowed into share buybacks by companies – has done more to boost shares than the break-glass attitude of the president. Continued economic growth also matters more than anything else from the U.S. White House.
Back to Brazil
Our admittedly small and selective sample of bully presidents – which could easily include, say, Russian President Vladimir Putin and Turkey’s President Erdogan (among many others) – can’t really tell us that much.
But investors in Brazil are clearly anticipating good things – market-wise, at least – from Bolsonaro. The iShares MSCI Brazil Index ETF (NYSE; ticker: EWZ), the biggest Brazil ETF, is up 30 percent since mid-September. But it’s still down slightly in the year to date – and it’s 20 percent below five-year highs. Trading at a CAPE (cyclically adjusted price/earnings ratio) of around 15, the market is on the cheap end of the spectrum. If Bolsonaro can do what he promises, Brazilian shares may have a lot farther to go.
Publisher, Stansberry Churchouse Research