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World Economy in Transition Emerging Stock Markets in 1995: Decline Followed by Year-End Upturn

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1996
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EMERGING STOCK markets had a difficult year in 1995. The International Finance Corporation’s Investable Composite Index (IFCI Composite), which tracks share prices in 26 emerging markets (Box 1), was down 10.3 percent (in US dollar terms) at the end of the year, despite a rally that began in April and lasted through July, and a gain of 3.3 percent in December.

The year began with some of the largest monthly declines in the history of the IFC Indexes, following heavy losses in December 1994, as anxiety about Mexico’s currency crisis, expectations of increases in world interest rates, and the collapse of Baring Brothers triggered massive sell-offs of shares in all regions. The losses for December 1994 and January 1995 combined were for the emerging markets, of a magnitude to compare with the October 1987 world stock market crash.

The most striking feature of emerging market performance in 1995 was the slide of Latin America’s stock markets. Overall, the IFCI Latin America Index lost 19 percent in 1995, despite a rebound in December. As the year opened, share prices in Latin America plunged; the IFCI Mexico Index lost 32 percent in January and another 18 percent in February, amid concerns about the stability of Mexico’s banking system, an uncertain outlook for the peso, the impact of interest rate increases on economic growth and corporate solvency, and an uneasy political situation. A short-lived recovery of Latin America’s stock markets began in April, fueled in part by perceptions that Mexico’s economic situation was stabilizing and by the Chilean government’s easing of limits on equity investments by pension funds. By August, however, share prices throughout the region began to slide again, the result of fresh concern about Mexico, talk about higher taxes in Brazil, and a political crisis in Colombia. The IFCI Latin America Index remained depressed until December, when it gained 1.8 percent, thanks to sharp increases in the IFCI Indexes for Argentina, Colombia, and Venezuela.

The IFCI Asia Index was down only 7 percent for the year, as a gain of 4.4 percent in December offset losses in some markets earlier in the year. Several markets had registered gains in the spring—elections in the Philippines boosted the IFCI Index for that country, and China’s stock market surged in response to a government ban on trading in bond futures—but prices began to drop again in August. The IFCI Indexes for the Philippines and China were down 12.9 percent and 22.7 percent, respectively, at the end of the year. Although the IFCI Index for the Republic of Korea bucked the downward trend in the fall—corporate and personal income tax cuts and rising foreign investor interest led to a 9 percent gain in September—it still fell 7.9 percent for the year. Despite a gain of 8.2 percent in December, the IFCI Index for Taiwan Province of China was down 31.5 percent as the year closed. Pakistan, where share prices climbed 11.2 percent in December, was unable to wipe out losses due to political turmoil earlier in the year; its market registered a net loss of 33.7 percent.

Box 1.Monitoring emerging markets

Through its Emerging Markets Data Base, the International Finance Corporation (IFC) monitors the performance of more than 1,600 stocks in 27 developing countries. Based on a sample of stocks in each market, IFC calculates daily, weekly, and monthly indexes of stock market performance that are consistent across national boundaries. The IFC Global Indexes, launched in the mid-1980s, were the first series developed by IFC. Unlike the IFC Investable Indexes, launched in 1988, the IFC Global Indexes do not take into consideration restrictions on foreign ownership in emerging stock markets.

IFC’s indexes include IFCI Asia: China, India, Indonesia, the Republic of Korea, Malaysia, Pakistan, the Philippines, Sri Lanka, Taiwan Province of China, Thailand: IFCI Latin America: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela; IFCI Europe, Middle East, Africa: the Czech Republic, Greece, Hungary, Jordan, Poland, Portugal, South Africa, Turkey, Zimbabwe.

Box 2.Best-performing emerging market of 1995: Jordan

Jordanian equities staged an impressive recovery during 1995. The IFCI Index for Jordan surged 23.1 percent; monthly turnover of shares remained at high levels, averaging about $43 million.

The recovery was driven by positive developments in the peace process with Israel, expectations of a rebound in foreign investment, and a better-than-expected tourist season. Prospects for an improved business climate were bright following the Middle East/North African Economic Summit in Amman in October 1995 and the passage of a new investment law. The law raised the ceiling on foreign ownership of companies; eliminated distinctions between Jordanian and foreign investors; offered investors substantial tax cuts and other incentives; and reduced red tape.

Graeme Littler, a Canadian national, is Editor of the Monthly Review of Emerging Stock Markets, published by IFC’s Emerging Markets Data Base Unit.

Ziad Maalouf, a Lebanese national, is a Market Analyst with IFC’s Emerging Markets Data Base Unit.

There was one exception to a generally dismal year. The IFCI EMEA (Europe, Middle East, and Africa) Index soared 20 percent for the year, but this was due largely to solid gains in the heavily weighted IFCI Index for South Africa. An overall decline in November triggered by investor concern that the booming economies in the region were overheating was followed by a 3.5 percent gain in the IFCI EMEA Index, but results in individual countries were mixed. For example, for the year as a whole, the IFCI Index for Jordan rose 23.1 percent (Box 2), but share prices in Turkey lost 13.4 percent.

The year ended on a positive note, however. Losses in many markets were curtailed by the rebound in December, which was fueled by attractive stock valuations, improved political and economic conditions in many countries, and buoyant equity markets and falling bond yields in industrial countries.

Chart 1.Emerging stock markets rebounding after declines in 1995 Changes in IFC indexes, January 14,1994-January 12,1996 (US dollars)

(January 14, 1994=100)

Note: See Box 1 for countries included in regional indexes.

Chart 2.Total capitalization of emerging stock markets at November 30,1995

Chart 3.Number of domestic companies listed on emerging stock markets at November 30, 1995

Chart 4.Value of shares traded in emerging stock markets, November 1995

Source: IFC Emerging Markets Data Base.

Emerging Markets Data Bust products air available in both print and electronic form. For more information. call (202) 473-9520 or write in EMDH, 1850 I Steet, NW, Room l-3-l75, Washington, DC 20433

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