First published in the Daily Maverick 168 weekly newspaper.

Social unrest carries an economic cost, and not just the immediate price to be paid to replace smashed windows or torched cars. The smoke signal of social distress can set off alarm bells among investors. One way of measuring this is to see how stock markets respond.

This is what the International Monetary Fund (IMF) did in a recent staff working paper, Pricing Protest: The Response of Financial Markets to Social Unrest. It found that stock markets do respond to social unrest.

“We find that social unrest leads to a significant reduction in stock market returns. Cumulative abnormal returns drop by around 0.72 percentage points three days after the unrest,” the authors of the paper write.

Even more revealing is the uneven reaction rooted in systems of governance. In countries with high governance standards and open, democratic institutions, the paper says, “the impact … seems to be negligible: the cumulative abnormal returns are never significantly different from zero”.

By contrast, in more authoritarian states with shoddy governance records, the response in dealing rooms is to hit the “sell button” and get out of Dodge.

“The impact of social unrest is more negative in less democratic countries: cumulative abnormal returns in these countries drop by more than 3 percentage points over the 14-day event window,” says the paper, which drew on a new dataset of 156 social unrest events in 72 countries from 2011 to 2020.

The two broad governance camps were divided using six measures of social and political institutions that form the World Bank Governance Indicators to assign polity scores.

“Of these, two factors play a crucial role in mitigating negative stock market reactions to social unrest events: popular participation in government, and the ability of the government to regulate markets in ways that promote private sector development,” the IMF notes on its blog site.

So, why are market reactions so pointedly different between the likes of, say, Venezuela and New Zealand?

“[T]hese results imply that in countries with high standards of governance, social unrest does not lead to more disagreement and uncertainty about future economic performance,” the IMF says.

“This perhaps reflects the ability of more open institutions to reconcile divergent opinions and find compromises,” the fund adds.

“In contrast, this flexibility may be missing in more authoritarian systems. There, institutions may be less able to adapt to social problems, meaning that unrest can lead to rising fears of further uncertainty and deter investors.”

Neither the paper, nor the accompanying blog, specifically mention South Africa, which is a pity. South Africa is open and democratic, with an open and liquid stock market in the JSE, but the country also has serious shortcomings on the governance front, to put it mildly. And South Africa certainly has high rates of social unrest – so much, in fact, that much of it goes unreported. Social and labour unrest are often cited as key investor concerns in South Africa, and have had a material impact at times on the mining sector in the past decade. Witness Lonmin, which was reduced to a penny stock as it staggered to extinction.

Service delivery protests, which are a regular feature of the South African landscape, are so commonplace that one reckons they never trigger an immediate market reaction. The cumulative impact may be a different story, because they point to a fraying social fabric, but that was not within the scope of the paper.

In the appendix to the paper listing the events, South Africa gets four mentions. The October 2015 Fees Must Fall protests are listed, as well as the anti-Zuma protests in April 2017, Jacob Zuma’s resignation as president in February 2018, and the spate of xenophobic attacks in September 2019 (which was not the only such flare-up in the past decade). Nothing related to mining unrest, such as the Marikana massacre, is mentioned.

So when it comes to South Africa, the data that the paper drew on had some glaring omissions.

Still, overall it provides an interesting take on how social unrest can affect markets. ESGs – environmental, social and governance issues – are all the rage these days in boardrooms and in company annual reports and financial statements. This linkage helps to explain why. DM168