Intuitively, any impeachment noise should result in an overall weakening trend rather than compelling, implying the level of volatility will increase as investors dislike uncertainty with no clear signs of their expected returns. Nixon’s Watergate scandal which started to gain traction by 30 January 1973 until his resignation on 8 August 1974 saw the S&P 500 plunging by 29.6% to 81.6, Dow falling 20.9% to 784.9, DXY depreciating 6.8% to 101.6 and the 10-year Treasury yields rising 22.2% to 7.9%. During that period, we found the Malaysian ringgit (MYR) gaining 14% to 2.4155 on 8 August 1974.

When the Lewinsky scenario initially emerged, there was no hiccup until 19 December 1998 when the impeachment started till February 2, 1999 when Clinton was acquitted. During that time, both the S&P 500 and Dow rose 4.9% to 1,262.0 and 3.2% to 9,274.1 respectively. The DXY appreciated by 1.4% to 95.7 and the US 10-year treasury yields gained 3.4% to reach 4.8%. We also saw strong knock-on effects on the Malaysian KLCI and USD/MYR. However, the strong impact on the KLCI as well as USD/MYR was due to the 1997/98 Asian financial crisis (AFC) which erupted on 2 July 1997. As a result of the AFC, the authorities introduced capital controls on 2 September 1998, pegging the USD/MYR at 3.800.

Looking at the current Trump’s scenario, there seems to be some similarity with the Lewinsky’s issue when it first emerged. Despite the ongoing noises, there are no hiccups on the US market. Though there is no serious impact at the moment, room for volatility to creep up remains on the table, especially when the noise of a likelihood of an impeachment becomes louder. Much will depend on the investors’ perception. If they envisage there will be some policy changes following an impeachment which is damaging to the economy, the asset class performance is poised to become weak. But if they view the policy changes from impeachment will yield positive impact on the economy, the asset class performance will benefit positively.

How will the Malaysian asset class perform? We believe the Nixon and Lewinsky scenarios are not good reference points. In the case of the former, we had the oil crisis and the ending of the dollar-gold convertibility in 1971, while during the latter, Malaysia was hit by the AFC crisis. Hence, we decided to look at the impact of Dow, DXY and US 10-year treasury yields on the Malaysian asset class performance i.e. the USD/MYR, KLCI and the MGS yields. From our assessment using daily data, we found the impulse shock from the US asset classes on the Malaysian asset classes would last between 2 and 20 days. Other key points we would like to highlight are: (1) the KLCI is vulnerable to the Dow and US 10-year treasury yields; (2) USD/MYR is sensitive to Dow, DXY and US 10-year treasury; and (3) MGS 3- & 7-year yields are influenced by the Dow while the MGS 3, 5, 7 & 10 are sensitive to the DXY and US 10-year Treasury. Hence, the strategy we believe would be more of trading opportunities looking at high beta stocks while also seeking avenue to either buy on dips or sell on strength.

Source: AmInvest Research - 23 Nov 2017