IPO: Impeachment Philippines, Opportunity By Gregory Fossedal Copyright © United Press International July 18, 2005 NEW YORK -- Gloria Arroyo, Manila's Margaret Thatcher, has been a gutsy combatant in the war on terror, and an effective leader whose domestic economic policies have produced a strong rally in the country's stock market. There's a good chance she will beat back the drums of impeachment now thumping in the Filipino Congress. In which case, it will be a time to buy. But as that resolution appears weeks in the future, not hours or days -- and is far from assured, as vindictive Philippine political elites sharpen their knives -- that time is in the future. Impeachment investing: companies Companies that replace their CEO, counter-intuitively, generally enjoy a stock rally. (Take a look at Hewlett Packard and Morgan Stanley, for example.) But as the necessity of a corporate impeachment suggests, this usually follows months or years of poor performance for the company and the stock. The Philippines, and most political struggles, differ from this model in at least two respects. First, political impeachment dramas are public affairs. Often in the corporate world, the power struggle leading to a firing is secret, or at least, less transparent than a debate on C-Span. By the time a corporate actual changeover is announced, most of the bad news is smoke heading out of the tailpipe, reflecting the past. Investors, looking inexorably ahead, are relieved at the acknowledgement of failure, and the prospects new management will get it right. But usually, during the sub-rosa drama, prices are down. In the Philippines, the attack on Arroyo, which centeres on alleged vote-rigging charges, is well known, playing out now, and far from certain. We are not at the firing or survival stage; we are at the struggle phase. Second, any Arroyo impeachment is hardly a promising strategy for "Philippines Inc." based on the economic fundamentals. Arroyo has been a gutsy leader who's been a lot more manly cracking down on terrorism than her whimpy generals and conterparts in the political class. She reduced income tax rates (alas, raising the VAT rate slightly) and has run a stable monetary policy. All this helped lift the Philippine stock market from just above 1000 in 2003 to more than 2000 in recent months, a solid double. Regular readers who followed the advice of Bottom Line benefited from this runup. (See, "Democracy Agonistes," March 24, 2004, and "Manila's Maggie," March 23, 2003.) Impeachment investing: countries Countries going through an impeachment proceeding or analagous struggle -- regardless of the merits or outcome -- nearly always suffer a bearish correction. — Argentina went through a series of presidential resignations and replacements in 2001-2002, and the market plunged by more than 60 percent in dollar terms. This was despite the fact that the proximate cause -- the agony over the country's 1-1 currency link to the dollar, and the need to float the currency or repeg at something more like a 3-1 rate -- justified an adjustment, which, when implemented, led to a nice rally over 2002-2005. — Brazil has spent the last several weeks at the start of its own presidential scandal. This has driven Brazilian equities off their highs, and is likely to continue to do so. — Even the United States, in the summer and fall of 1998, experienced its own impeachment crisis over the Lewinsky affair, bringing about an excellent short opportunity and correction, even in the midst of the surging 1991-2000 bull market. And the U.S. is a relatively advanced democracy. (Please, no emails about Florida.) For the Philippines, a serial replacer of presidents under duress, there is hardly a need for more political instability. This is not to say that a country shouldn't remove even an effective chief executive if he or she breaks the law. From my conversations with several election observers there, the vote-fraud accusation appears to be without merit. Furthermore, her victory was large enough that it's highly unlikely her mandate is tainted by a few misplaced chads. Nevertheless, even if such activity didn't change the outcome, it's a serious matter: the more so for a country that's trying to overcome a long history of dubious election results. Release of a taped conversation recently, suggesting that at the least, Mrs. Arroyo didn't discourage such activity, does not help. She has declined to respond substantively to that release -- not the way to put it to rest. Bottom Line Whatever the outcome, the Philippines appears to be in for an epic political struggle in which a generally effective president may be removed. Even if that's merited by her actions, it will be agonizing, and bearish for equities. On the other hand, if Mrs. Arroyo survives, it will only be after a continuing mud-wrestling match. This week, Mrs. Arroyo stood down protestors who stormed government buildings, and won support from the Catholic bishops for continuing her term. The latter move had a dominoe effect, causing a number of business leaders who had called for her removal or resignation to flip-flop and withdraw their suggestion. Even so, Manila's Maggie faces well-organized opposition from her opponents. And ambitious members of her own party are making noises that indicate they're far from certain to back her. Arroyo will emerge stronger only if she not only beats back the impeachment effort, but does it in a decisive way, and follows through with policy victories. That will take weeks, not hours. The time to buy, at the earliest, will be when the impeachment is scheduled and the fight begins in earnest. Reluctantly, at least for the short term, we're short the Philippines. Gregory Fossedal, foss@upi.com, is an advisor to international investors on global markets and ideopolitical risk and a senior fellow at the Alexis de Tocqueville Institution. His clients may hold long and short positions in many of the investment securities and opportunities mentioned in his reports. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, AdTI, or UPI. Furthermore, they are subject to change without notice.