Illusory Control

African Stock Markets: The Show Must Go On

By David Whitehouse, El Mehdi Berrada

Posted on March 19, 2020 06:19 (77) © The Johannesburg Stock Exchange in Sandton. REUTERS/Siphiwe Sibeko
The Johannesburg Stock Exchange in Sandton. REUTERS/Siphiwe Sibeko

Africa can’t afford to follow the Philiippines and Sri Lanka in suspending stock trading in the coronavirus crash. — ““The risk is that [shutting stock markets] may in fact signal panic on the part of the authorities which aggravates fear elsewhere.”

Investors and analysts say that African markets need to keep the show on the road.

“Panic stricken people believe doing something is better than nothing as it provides a measure of control,” says Fabian de Beer, director of investments at Mergence Investment Managers in Cape Town. “The risk is that it may in fact signal panic on the part of the authorities which aggravates fear elsewhere.”

  • De Beer fears that closing markets will prompt investors to rush for the exits when they reopen.
  • “It risks compounding the problem subsequently. One can only hold up a burst dam wall for so long.”

Declines in share prices since coronavirus went global has hit equity markets everywhere.

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Yet the need to maintain transparency is especially important in emerging markets.

  • Closing them down while developed markets remain open would “further reinforce the notion that they are fundamentally different and somehow less appropriate for investors,” said Robert Johnson, professor of finance at Creighton University’s Heider College of Business in the US.
  • Shutdown would “impede the integration of emerging markets into the global financial market system,” he adds.

Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos, agrees.

  • Closing the market “might lead to a massive sell-off when the market is re-opened,” he said.
  • “Uninformed investors might think there are fundamental issues in the market that regulators are trying to cover up.”

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For Craig Smith, head of research and property at Anchor Stockbrokers in Johannesburg, closure “undermines the very foundation of the capital markets — it is obviously extremely painful but the market needs to be allowed find equilibrium.”

Veiled Threat

Global stock exchanges remained open during the 2008 great financial crisis. Stock markets in the US closed in the immediate aftermath of the September 11 terrorist attack in 2001, as many trading and brokerage firms had offices in the World Trade Center and were unable to function.

Yet the coronavirus poses no threat to the physical architecture of today’s markets.

  • De Beer at Mergence says that he has never seen an overly hot and bullish market being closed on the argument that prices are going up too fast – so there is no obvious reason why it should be any different on the way down.
  • The only exception, he says, is when the market “hopelessly fails” in its objective of price discovery or where “there clearly is a sound case to intervene in order to restore its proper functioning”.

“Nothing good ever comes from placing a veil over a market,” says Harry Broadman, chair of the emerging markets practice at Berkeley Research in Washington.

  • That’s especially true when it’s not clear when trading will be halted and renewed, he says.
  • Shutting the doors does nothing to promote “policy confidence and economic growth, two ingredients that tend to be in short supply in many emerging markets.”

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“South African, Nigerian and Kenyan stock markets should remain open for one main reason —confidence-building, as opposed to panicking,” says David Himbara, a former adviser to Rwandan President Paul Kagame.

  • “Shutting down markets is tantamount to the cowardly act of throwing in the towel. African stock markets should remain open at all costs.”

Moroccan regulator limits moves

On the Casablanca Stock Exchange, MASI, the global index, has lost more than 20% in one week. The Moroccan Capital Market Authority (AMMC) excludes market closure at this stage. However, it has decided to modify the thresholds for changes in listed securities.

Since March 17 and until further notice, the maximum upward and downward variation in the price of a financial instrument during a single trading session may not exceed the following thresholds: 4% of the reference price for equity securities listed in continuous mode, 2% of the reference price for equity securities listed in fixed mode and 2% of the reference price for debt securities.

The Casablanca Stock Exchange regulator hopes to limit the haemorrhage and restore some confidence to investors.

  • “The AMMC will continue to monitor the stock market with vigilance and will not fail to use the tools at its disposal to preserve the smooth functioning of the capital market,” the regulator adds.

Bottom Line: The pain may get worse, but the best long-term course for African equity markets is to stay open.


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