Sunday, September 27, 2020

Impact of the Financial Economic Crisis on Regional Markets: Can Confidence be regained?

The unravelling of the current credit crisis is by now well documented and understood. Looking at its impact on the regional stock market, it is noted that the Mauritius Stock Exchange lost 36.7 percent of index value, Lusaka -28.7 percent, Johannesburg Stock Exchange -25.7 percent and the BSE -16.5 percent.

It was the first time the BSE Domestic Company index became negative in 2008 and this shows the extent of the impact of the financial crisis on financial markets.

Although most regional indices were negative by end of 2008, the value of shares traded increase in most exchanges because most investors were selling their shares while others who were optimistic bought shares.

An analysis of the performance of regional and international stock market indices shows that stock market upturn was seen since March 2009.

This is not surprising because if precedence is to be set recessions take 6 to 18 months according to economic theory and stock markets also recover 6 months before the general economy bottom.

In almost 8 out of the 10 recessions, markets bottomed on average 6 months before the economy.

This has been seen in many other recessions before. Equities markets also do not necessarily need very strong macroeconomic data to perform strongly.

In regaining confidence, economist and investment managers based its belief in that “Recessions are like ancestors and their children” ÔÇô although different there are some similarities.

Therefore when a recession hit the world they are able to reflect on strategies to lead them out of the crisis.

Research on previous financial crisis, especially the Great Depression led economists to conclude that the present financial crisis recovery will depend on four factors successfully coming together: 1) monetary easing, 2) fiscal expansion, 3) bank restructuring and 4) a boost to confidence. A boost to confidence depends on the success of the first three conditions.

There is a general consensus that recovery will be significant in 2010 and some countries have already seen positive growth.

They include Germany and France that rose 0.3 percent in April- June 2009 quarter while Japan grew by 0.9 percent in the same period and is predicted to go up 3.7 percent by year end.

Economic recovery is likely to be intercepted with drawbacks but its trend is clear and this gives markets some confidence hence the upturn.

The unprecedented fiscal and monetary stimulus packages significant reduced the risk of a state of total collapse of the economies.

The consumer data coming out worldwide shows that there are some positive signs of consumer confidence recovery.

The financial system is also starting to function. Some companies have started to declare profits in the second quarter of 2009, but most profits are a result of companies’ response to the economic crisis by cutting costs to bolster their balance sheet.

Some economists are pessimistic about such profits on whether they are sustainable in the long run.

Economists believe that the growth profile will be a “V” with anaemic growth i.e. lacking power, vigour, and vitality or less colourful or weak.

This is because the markets still has to account for numerous risks. Some are pessimistic that the current rally is brought by earning upgrades attributable to cost cutting hence market growth profile may follow a “W”.

The various growth profiles however will be influenced by the success of the various economic stimulus packages.

The economic recovery can be likened to “having a patient waking from a coma and talking to medical staff, so don’t expect him to run a marathon soon”.

It is likely to be the mother of all jobless economic recoveries. Investors generally have confidence because equities have historically remained the only way to protect the real value of capital.

Again Recovery, Growth and Prosperity followed each of the market crashes therefore investors will have to ignore investing in equities at their own peril.

(Thapelo Tsheole is a Product Development Manager at the Botswana Stock Exchange)

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Sunday Standard September 27 – 3 October

Digital copy of Sunday Standard issue of September 27 - 3 October, 2020.