How Do Populist Leaders Help Stocks and Hurt Currencies?

The so-called Trump bump stock rally is not unique. When populist leaders get elected across the globe the stock market in their country goes up. Later on, all too often, the local currency does not do so well in the Forex market. How do populist leaders help stocks and hurt currencies? For the first part we look at an article posted on Bloomberg Markets, populism is great for stock returns.

If the last two decades of anti-establishment rule are any guide, the world may be on the brink of some monster stock rallies as it takes a turn toward populism.

A look at 10 of the 21st century’s most recognized populist leaders shows that in the three years after their election, local equities soared an average of 155 percent in dollar terms. And the rallies often continued as long as a decade after the vote.

This happens because populist leaders create a short term stimulus while running up their nation’s debt.

Market performance under populist leaders is an issue front-and-center for investors as firebrand leaders who promise to put their people first go on the march from the U.S. to India to Turkey and the Philippines. Though economists say policies such as cracking down on imports, championing local industries and raising government spending will stifle growth in the long term, data compiled by Bloomberg shows that stock buyers can do quite well for years after a populist comes to office.

But So Good in the Long Term

The article notes that Lula da Silva in Brazil and Putin in Russia oversaw huge stock market rallies for up to ten years. The underlying problem in almost all of these situations is mounting debt coupled with questionable governance. Venezuela is a clear example of a country that paid off the supporters of the ruling party to the detriment of the economy and its currency.

Currency Devaluation

There are three reasons that nations devalue their currencies. The first, as practiced by Japan, China, Taiwan and others is to gain a competitive advantage in trade buy exporting more and importing less. But populist leaders who buy the support of their countrymen with handouts run up huge debts and in this case devaluation is done to reduce sovereign debt burdens. Investopedia writes about currency devaluation.

A government may be incentivized to encourage a weak currency policy if it has a lot of government issued sovereign debt to service on a regular basis. If debt payments are fixed, a weaker currency makes these payments effectively less expensive over time.

The problem when populist leaders help stocks and hurt currencies is when to invest and when to get out. Typically one will see two curves, the rise of the value of stocks as denominated in the local currency and the fall in the local currency in relation to the US dollar. It would appear that investing in stocks after a populist leader takes office is a good idea and getting out before their policies ruin the currency is even better.