Trump’s Tariff ‘Psychodrama’ – What’s the Relationship Between Geopolitical Risk (Government Stability) and Equity Prices?

Tariff uncertainty – the latest in the Trump ‘psychodrama’ (as Canada’s foreign affairs minister, Melanie Joly, called it) – appears to have had an impact on US stocks.  The NASDAQ is down more than 10% from its recent peak, and the ‘Bloomberg Magnificent 7 index,’ which includes the dominant tech groups, is down 16%, dropping below its 200-day moving average for the first time in more than two years:

This is not surprising as the connection between ‘government stability’ and equity prices is well known.

In this 2019 piece published in the Journal of Emerging Market Finance, four ‘principal components’ of our ICRG were considered to assess their impact on equity prices for 28 developed and emerging market countries from 2001 to 2015.

Among the findings: ICRG’s ‘Government Stability’ risk metric produces a negative hedge in the all-country sample.  ‘Socio-economic conditions’ produces the highest positive hedge return.  ‘Ethnic’ and ‘Religious Tensions’ contribute a positive hedge return of 5.6% p.a, of which 6.7% p.a. is related to emerging markets.  A similar trend is detected for ‘Religious Tensions.’

(https://lnkd.in/dfhD6WQU)

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