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December 15, 2016

The Market Sentimentalist – Political Kill

by Amareos.

2016’s “Political Kill” season continues, making this year one of the most toxic for incumbent politicians we can ever recall.

Monday saw Italian PM Renzi announce his resignation following the crushing defeat of his constitutional-reform-turned-personal-confidence-vote referendum; an outcome clearly flagged by our crowd-sourced sentiment indicators[1]. Although President Mattarella has apparently succeeded in convincing Renzi to stay on until after the passage of the 2017 fiscal budget, this appears to simply postpone the inevitable, rather than constitute anything more substantive. Indeed, speculation is already increasing that Italy may seek to add yet another election date to the already busy European 2017 political calendar[2].

Interestingly, despite all of the column inches expressing worry about the impact of Renzi’s resignation on the Italian economy, especially the banking sector, and the single currency project more generally, the market impact has been relatively muted. This is entirely consistent with our earlier view that much of the negative impact from a No vote had been priced in.

Indeed, most resilient of all was the EUR exchange rate, which managed not only to reverse its initial knee-jerk losses, but ended the first day of trading in positive territory. Such a solid performance is consistent with the generally constructive view the crowd has on the Euro zone currency. In fact, compared with all the other developed market currencies the EUR is only surpassed by the USD, where the surge in sentiment evident over the past several weeks (ie. preceding Trump’s victory) appears, if anything, to have stalled.

Exhibit 1. Crowd-sourced Currency Sentiment



However, Renzi was not the only political leader whose time in office appears to be drawing to a close. South Korea’s President Park Geun-hye is facing an impeachment vote in parliament this Friday, (this Market Insight was written just prior to the vote, which see lost) having failed to pacify her critics with her pledge to step-down in April.

The scandal that has brought about these events relates to her close friendship with Choi Soon-sil, who it is alleged, used her influence with the President to extract donations from leading South Korean companies, including Samsung[3], for her foundations.

As can be seen in the exhibits below the scandal has triggered a surge in public protest, captured by the sharp rise in our social unrest indicator (exhibit 2) and which, in turn, has contributed to South Korea becoming the crowd’s “most-hated” country (exhibit 3).

Exhibit 2. Crowd-sourced Social Unrest Sentiment



Exhibit 3. Crowd-sourced Country Sentiment



Unsurprisingly, when we drill down to see which of the eight primary emotions are driving this negativity, we find the predominant emotion by far is disgust – it stands at its highest possible level.

Exhibit 4. Emotions Polar Map



Such readings are reminiscent of what we observed last December in Brazil, when President Rousseff was also facing impeachment proceedings (the only emotion of the eight primary emotions we track that is notably different is Sadness). At the time we suggested that,

“[s]uch extreme sentiment readings, in combination with the marked asset price underperformance, suggests that Brazilian equities may in fact prove fruitful hunting ground for investors seeking attractive long-run investment opportunities and attempting exploit the nascent swing away from the Leftist-Populist policies that have dominated the region over much of the past decade[4].

This viewpoint is entirely consistent with the contrarian approach we outlined in an earlier Market Insight[5], seeking to exploit the fact that the superior forecasting ability of “the many over the few” is impaired when there is a lack of diversity of opinion as occurs when sentiment readings are either extremely high or extremely low. For Brazil the signal from the crowd-sourced sentiment data was very prescient as shown in the exhibit below: the Bovespa having rallied more than 33% year-to-date.

Exhibit 5. Bovespa – Crowd-sourced Sentiment vs. Price



So, is the extreme crowd negativity driven once more by political scandal Mr. Market offering investors another early Christmas present?

Unlike Brazil there is an rather obvious unstable neighbour, whose leader has a penchant for hackers[6], to worry about. This is an ever-present threat, and hence should be considered almost like a constant in any South Korea investment equation, yet, in our view, there is heightened risk of a flare-up in tension at present.

Kim Jong-un’s father conducted a nuclear test shortly after Obama took over from Bush in his first term as President[7], and while China strongly denounced North Korea’s fifth nuclear test in September, they may be less inclined to do so again having been angered by some of President-elect Trump’s recent activities. Specifically, we are referring to his telephone conversation with the Taiwanese President – the first time there has been an official communication between the two administrations at such a high level since 1979 – which is seen as potentially challenging the “One-China” principle, and his late night tweets[8] criticising Chinese FX policy[9].

Moreover, the weakness in the CNY, and especially the sustained devaluation of the JPY[10] – a key cross-rate for Korean exporters – is undermining the external competitiveness of South Korea and hence is a potential downside risk for the economy. That said, as can be seen in the final exhibit, crowd-sourced sentiment towards the country’s economic growth rate, which tends to track changes in the South Korea equity index fairly closely, is low relative to the series history. Moreover, when we look at the more forward looking Optimism sentiment indicator, there has been a marked easing in pessimism. Overall, it is probably fair to assume that a great deal negativity has already been incorporated into South Korean equities, making us guardedly optimistic about the outlook.

Exhibit 6. Crowd-sourced Sentiment vs. Equities – South Korea



Sentiment Analytics are based on MarketPsych indices

[1] The margin of defeat (59 vs. 41) was so large that even the opinion polls, whose prediction track record makes even economists look good, got it right.

[2] As we detailed in our Market Insight previewing the Italian referendum – see:

[3] We discussed the outlook for Samsung in a recent Flash Note – see:

[4] See:

[5] See:

[6] See:

[7] 25 May 2009 to be exact.

[8]  Surely someone in the administration is going to pull the plug on such activity before he gets sworn in. We acknowledge that the US courts have validated Twitter as an acceptable avenue for publicly listed companies to make announcements (much to Elon Musk’s delight) but not US foreign and economic policy, please!

[9] See:

[10] We discussed our outlook of the JPY in a recent Market Insight – see:

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