CITI: This Year's Sea-Change Elections Could Mean Tremendous Volatility In The Emerging Markets

Conventional wisdom warns that election years are good for markets as the government pumps money into the economy and does everything else it can to make sure its voters are happy. A new Citi report by Geoffrey Dennis looks at 11 sea-change elections in emerging markets over the past 15 years and equity market performance before and after these elections.

Sea-change elections are those that lead to fundamental changes in the countries policies. The positive market response usually suggests that investors are unwilling to buy the sea-change effect until after the election, or that they have already priced in a potential negative sea-change.

Going into 2012 the report says the most obvious sea-change elections this year will be in Egypt and Mexico.  Both countries are likely to have a strong post-election equity market performance. A less obvious sea-change election result could be seen in Malaysia, where if the ruling party lost power, markets would likely sell off.

Here’s a chart from Citi global markets that looks at equity performance before and after sea-change elections in emerging markets. This also includes Thailand’s massive swing from +1.5 per cent 6 months prior to the military coup, to -20.4 per cent 6 months after:

sea change elections

Photo: Citigroup Global Markets

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