3. An Investigation into Financial Development and Contagion
3.6 Stock market conditions from 2007 to 2012
Figure 3.2 gives an overview of the evolution of the stock market indices in eight SEMCs, adjusted for US dollar terms. As is clear from the figures, the impact of the financial crisis varies from country to country. In particular, as of November 2012, the Israeli, Tunisian and Turkish stock exchanges have outperformed the US Dow-Jones index during the global crisis. At the same time, the Egyptian, Jordanian, Palestinian and Syrian indices remained below their January 2007 levels.
The figures also highlight a positive linkage between commodity prices and stock markets in 2007-08. This is surprising since the countries in the sample are mostly commodity importers, which should suffer from the adverse wealth effects of high energy prices. The relationship is most likely a latent effect of growing production in emerging markets, including most notably Brazil, Russia, India and China (BRICs), and the consequent rise in global demand for oil (Hamilton, 2009). To put it simply, the rising oil prices probably serve as a proxy for growing output and consequently growing investment opportunities in emerging and frontier economies. For the years 2007-08, the rise in oil prices appear to have led to a substantial rise in stock market indices in many of the countries covered in the study.
For those years, one can say that the close links with commodity prices is evidence that emerging markets have de-coupled themselves from the EU and the US capital markets, which fared worse. The more recent (and the more persistent) spike in commodity prices of 2011-12, however, has not
been equally beneficial for the SEMCs, which is most likely due to the Arab spring and the worsening of the eurozone crisis.
Turning to a detailed analysis of each country, in Egypt the evolution of the EGX-30 index has been closely related to the price of commodities, at least prior to the onset of the Arab spring events. The rapid rise in the index has also overlapped with the merger of the Cairo and Alexandria stock exchanges (CASE) into the Egyptian Exchange in 2008. In May 2008, the decision of the government to increase domestic fuel prices, amidst the continuing rise in international prices, has led to a substantial drop of 70%
in the local currency value of the index, from its peak on 5 May 2008 to its trough on 5 February 2009. The worsening global conjecture, especially in the aftermath of the default of Lehman Brothers in September 2008, has probably also contributed to this severe loss in value. The index has fallen around 25% during the first three months of 2011 in the midst of the Arab spring and the ousting of President Mubarak, resulting in the closing of the country’s stock exchange for around eight weeks. The losses continued after the exchange resumed its operations in March 2011, with the EGX-30 reaching an historical low by the end of 2011. Since then, the exchange has been on an upward trajectory.
Figure 3.2 Stock market indices in SEMCs, January 2007-November 2012
(a) Egypt (EGX-30)
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EGY EU US
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EGY Oil-Brent Grains
(b) Israel (TA-100)
(c) Jordan (ASE Free float index)
(d) Lebanon (MSCI, Large & Mid cap)
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ISR EU US
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ISR Oil-Brent Grains
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JOR EU US
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JOR Oil-Brent Grains
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LEB EU US
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LEB Oil-Brent Grains
(e) Morocco (MSCI, Large & Mid cap)
(f) Palestine (Al-Quds)
(g) Tunisia (TUNINDEX)
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MAR EU US
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MAR Oil-Brent Grains
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PAL EU US
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PAL Oil-Brent Grains
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TUN EU US
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TUN Oil-Brent Grains
(h) Turkey (ISE-100)
Notes: All figures are normalised so that beginning January 2007 is set to 100. All figures are adjusted using weekly US dollar averages. For the US and the EU, the Dow Jones Composite Index (DJCI) and Euronext-100 have been used. In Morocco and Lebanon, the MSCI index was preferred to national sources due to the limited availability of data for earlier years.
Sources: National stock exchange websites; MSCI.
The evolution of Israel’s stock market more closely follows the international markets, with the exception of a phase of over-performance between early 2009 and early 2011, despite worsening global financial conditions and the Gaza Flotilla raid in May 2010. The sharp drop in the index in August 2011 overlapped with the Standard and Poor’s downgrading of the US sovereign debt and growing troubles in the eurozone periphery. Since then, the market evolution has closely followed the international markets and has failed to benefit from the re-emergence of investment flows to emerging and potentially high-growth countries, such as Israel.
Jordan’s stock market has followed the evolution of oil prices prior to 2009. Much like in Egypt, this most likely reflects growing interest in Jordan as a frontier high-growth economy. Indeed, the foreign interest has led to a rapid growth in Jordan’s financial services and real estate sectors prior to October 2008. Persistent losses thereon are most likely due to the impact of the financial crisis as well as growing tensions within the region.
In the case of Lebanon, the stock market index closely follows the commodities markets prior to 2011. Once again, this is most likely due to growing interest among international investors in alternative emerging regions. It is important to note that the Lebanese market is one of the largest in the region, with a market capitalisation of nearly 30% of GDP in 2011. Although the market has outperformed the EU and US indices for
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TUR EU US
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TUR Oil-Brent Grains
most of the crisis, the growing regional tensions have led to persistent losses (much like in Jordan) since early 2010.
Morocco’s stock market has followed a similar pattern of Jordan and Lebanon, inching up with increasing commodity prices, which highlight growing demand for oil from emerging economies, possibly on the back of an increased interest in emerging economies among investors. Much like the two countries, the index has remained relatively stable (in USD terms) and consistently outperformed the EU and US averages up until late 2011.
The losses starting in the first half of 2011 are likely to be at least partly due to the Arab spring, although alternative issues, such as the slowdown in global demand, can also be at play.
The Palestinian stock exchange also appears to have benefited from increased interest from international investors in early 2008. The re-balancing act came swiftly, as in other stock exchanges in the region, with the fall of Lehman Brothers in September 2008 and in the months that followed. However, the USD-adjusted value of the index has remained relatively constant since then, which is significant given the substantial regional risks and ongoing conflict with Israel.
Tunisia’s stock market appears to be the best-performing market in the sample, at least in terms of providing consistent excess returns over the US and EU markets. The Tunindex continued its upward trend in most of the financial crisis with the exception of a relatively small drop in the second half of 2008. The market was buoyant in most of 2009 and reached historical levels by the end of 2010. However, the Arab spring did have a short negative impact, albeit short-lived, with accumulated losses of 15%
between January and February 2011. Following those dates, the index remained relatively stable up until November 2012.
Much like that of Israel, Turkey’s stock market has been highly sensitive to the changing global conditions. In particular, the Istanbul Stock Exchange index (ISE-100) has dropped a staggering 60% in the second half of 2008 following the Lehman bankruptcy. After this event, the market index inched upwards until 2011. Turkey’s exposure to the EU could be the main force behind the drop in the stock market index in early 2011, corresponding to the eurozone crisis. Since early 2012, however, the ISE-100 index has improved consistently, which is most likely due to the re-emergence of the country as an alternative investment destination globally.