Recent Political Crises and ETFs: A Brief History

by on April 16, 2014 | ETFs Mentioned:

From boom to bust to bubble, the ups and downs on Wall Street have proven to be a blessing for some investors’ portfolios and a curse for others. Calling the tops and picking the bottoms in the market is an easy chore, only in retrospect of course. While it’s true that past performance is no guarantee of future returns, there are still valuable lessons to be learned from the tumultuous times on Wall Street [see Visual Guide: Major Index Returns by Year from 1970].

Previously, we’ve recapped some of the Biggest ETF Bubbles as well as 10 of the Best ETF Trades of All Time; in the spirit of learning from experience, below we take a stroll down memory lane to revisit five of the more recent political crises and look at how they shook up the markets.

5. Egypt Index ETF (EGPT, C) Drops 7.2% on November 26th, 2012


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Demonstrations organized by Egyptian protesters against president Mohamed Morsi erupted on 11/22/2012 after the government enacted a temporary constitutional declaration granting it unlimited power. The protests intensified over the weekend as anti-Morsi demonstrators clashed with the armed Republican Guard, leading to bloodshed and then turmoil in the financial markets overseas. As the chart above illustrates, despite there being “blood on the street,” this was not the best time to buy in. In retrospect, Egypt’s political crisis got a lot worse before it got better from the ETF’s perspective; notice how EGPT sank another 30% following its steep one day drop before bottoming out in late June of 2013 [see also Egypt ETF In Focus: The Economic Consequences of Revolution].

4. FTSE Greece 20 ETF (GREK, B-) Sinks 54% in Four Months


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On 2/12/2012, approximately half a million protesters gathered outside the Parliament House in Athens to voice their opposition against the newly proposed austerity measures that would have to come in effect in order for the country to receive bailout funds from the European Union and International Monetary Fund. Despite the opposition, the austerity measures were passed the next day and on March 20th, 2012, the government still announced default. The protests in this case signaled the start of a downtrend; the Greece ETF dropped more than 50% before finding a bottom in early June [see also Euro Free Europe ETFdb Portfolio].

3. MSCI Thailand Capped ETF (THD, C+) Sinks 15% in Just Over One Month


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On 11/25/2013, protesters stormed their way into several government buildings, prompting their closure, in response to a recent court ruling. The Constitutional Court of Thailand ruled that a proposed amendment to the 2007 Constitution was invalid, which would have transformed the senate from a partially appointed body to a fully elected body as it was before the 2006 military coup. In this case, because the Thailand ETF had already been beat-down by more than 20% since peaking in May of 2013, its drop of 15% following the intensifying protests in November through its bottom in early 2014 wasn’t nearly as severe as the sell offs seen in the Egypt and Greece ETFs; put simply, the “bad news” came closer to the bottom in the case of THD, perhaps because the ETF had already endured a downtrend in the months prior to the crisis.

2. MSCI Turkey ETF (TUR, A-) Sheds 45% in Eight Months


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On 5/28/2013, a clash between police and protesters erupted in response to the public’s opposition to plans to demolish an iconic park in Istanbul. Leading up to this breakout were a series of government threats and attacks on people’s freedom of the press, of expression, assembly, and even religion. Adding to the “bad news” for TUR was the Fed’s mention of starting to taper stimulus on 5/22/2013, which in turn sparked a nasty sell-off for equities across the globe and sank this ETF over 45% before finding a bottom in early 2014. In this case, the Turkey ETF had enjoyed a stellar run-up in 2012-2013, which is why the combination of the taper scare and protests erupting led to such a steep decline; this was unlike the Thailand ETF, which had less room to fall, given its downtrend prior to the crisis [see ETF Pick of the Month: Emerging Market Country ETF Boasts Attractive Risk/Return Profile].

1. Market Vectors Russia ETF (RSX, B+) Drops 6.8% on March 3d, 2014


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On 3/3/2014, the political crisis between Russia and Ukraine intensified greatly after Russian military buildup in Crimea raised concerns over a potential military conflict breakout. Despite Russian officials denying the nature of the armed confrontation, financial markets overseas and at home responded with stiff selling pressures. The Russia ETF shed nearly 7% in a single session and proceeded to sink another 8% before finding a bottom on 3/13/2014. In this case, the “bad news” appears to have come at a relative low-point for RSX, which is perhaps why the selling pressures following the intensifying crisis weren’t as severe for RSX compared to the Turkey ETF, which had enjoyed a stellar run-up prior to the protests there.

The Bottom Line

It’s no surprise that political crises can rattle investors’ confidence and lead to steep declines, often times signalling multi-month downtrends. Furthermore, putting into practice the age-old adage on Wall Street that says, “the time to buy is when there’s blood on the street,” is no easy chore and not nearly as simple as the saying might suggest; in some cases, the proverbial blood is spilled well in advance of the worst days to come for a particular security, while in other instances, the “bad news” does in fact coincide with a bottom more so than a top. All in all, investors should maintain a defined risk-return profile and know why they bought a security in the first place, so that they can more objectively decide what to do in case a political crisis erupts and rattles their investments.

Follow me on Twitter @SBojinov

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Disclosure: No positions at time of writing.