Expect the worst on economic front is the clear message

JOHANNESBURG – Global central bankers, including the South African Reserve Bank, had no other choice than to deepen their quantitative easing to free up liquidity locally and worldwide to prevent a total collapse.

The massive dump of equities by global investors since the last week of February saw equity markets in developed countries, as measured by the MSCI World Index in terms of US dollars, slump by more than 20percent.

The behaviour of an equity market in a specific country is generally a good indication of what is happening in the country’s underlying economy. So too is the behaviour of global equity market indices a good indicator of the health of the global economy. There are, however, leads and lags as investor sentiment tends to be more volatile than the underlying economy but, most importantly, it is the major turning points that count.

I use my own proprietary formula to calculate the weekly smoothed annualised growth rate of stock indices to get an indication of what the stock market is anticipating about the economy.

It is evident that the weekly smoothed annualised growth rate of the MSCI World Index correctly anticipated the OECD GDP growth rate through the major cycles. The depth of the stock market contraction during the global financial crisis in 2008/09 correctly anticipated the depth of the recession at the time, followed by the strong recovery afterwards.