Strategy Note /

Stock market shutdowns: Philippines, Jordan, Sri Lanka are bad omens

  • Some shutdowns are systematic and temporary: eg circuit breakers in diverse markets Brazil, US, Kuwait, and Pakistan

  • But others are ad hoc (Sri Lanka) or indefinite (Jordan, Philippines) and these may well cause long-lasting damage...

  • ...Because they blur a vain attempt to stall market falls with a valid social distancing policy response to coronavirus

Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
17 March 2020
Published byTellimer Research

Across emerging and frontier markets, the more that the authorities can avoid stock (or debt, or currency) market shutdown, the better they will be served once the coronavirus crisis passes and there is an inevitably even greater need for external capital inflow. 

And if stock market shutdowns are an unavoidable consequence of the physical social distancing policy response to coronavirus then they should be communicated as such, with defined (albeit obviously adjustable) end dates. 

The worst outcome is to use the coronavirus as a reactive justification for halting a falling market (even though the market may be falling very rationally and very rapidly in response to the risks and disruption caused by the coronavirus).

Stock market shutdowns are not new

  • China shut its stock market for a week after the Lunar New Year this year (when COVID-19 was still being called the "Wuhan Coronavirus"). 
  • The New York stock exchange shut its stock market in 1997 (Asian crisis), in 2001 (9/11 attacks), and 2012 (Storm Sandy). 
  • Pakistan effectively shut (inhibiting transactions below prevailing share prices) in 2008-09 (post global financial and local political crisis). 
  • Egypt shut in 2011 ("Arab Spring"). 

There are other examples.

Ad hoc or indefinite shutdowns (Jordan, Philippines, and Sri Lanka)

The ad hoc (Sri Lanka) or indefinite (Jordan, Philippines) stock market shutdowns we are witnessing blur two objectives: 

(1) Maintain market order during an extreme swing (and limit systematic repercussions across the financial system and the spread of panic to corporate and consumer confidence); and

(2) Impose a universal physical quarantine in response to the coronavirus.

The first objective of addressing panic is ultimately self-defeating if the shutdown lasts for anything longer than the typical 15-45 minutes of a circuit-breaker; it compounds panic, can make the ultimate fall in stock market value even greater, raises the risk associated with transacting on that market in future, and can lead to a permanent exit of capital. 

An exception might be made if during the time of the shutdown a specific set of new government policies are announced (e.g. liquidity injection, fiscal stimulus, security or healthcare response) which changes a scenario of market panic to one where there is now sufficient information for investors to price assets rationally. 

The second objective of social distancing is partially obsolete in modern stock markets, which rely mainly on electronic platforms. Stock markets like Jordan, Philippines, and Sri Lanka are classified as frontier or emerging markets because they lack some of market processes and mechanisms, corporate disclosure, or trading liquidity standards associated with developed markets. They are not "frontier" in the nature of, for example, Myanmar, which is heavily reliant on the staff sitting in the stock exchange building to execute a limited number of trades. Nevertheless, it is fair to say that none of these markets could operate if there was literally nobody allowed into the stock exchange premise.

Now, if these markets were shut in the same breath and on the same time frame as universal lock-downs of that location (e.g. metropolitan Manila and now the whole of Luzon island in the Philippines), there would be more understanding of a natural disaster-type reason for the market shut-down (similar to Storm Sandy in the US in 2012). 

But what we are seeing in the likes of Jordan, Philippines, and Sri Lanka neither meets the description given above for the exceptional justification for closing stock markets (there is no silver bullet policy announcement), nor is this simply about a healthcare response to the coronavirus (otherwise the stock market would be shut, from day one, for as long as the overall physical lockdown). There is a blurring of both objectives defined above and this creates the suspicion that the coronavirus is being used as a justification for halting a falling market (even though the market may be falling very rationally in response to the risks posed by the coronavirus).