The stock market as a barometer of the future state of economic activity on the example of pre-emerging countries

Abstract

The article considers whether the stock market could be as a barometer of the future state of economic activity. The study was conducted on the example of a group of pre-emerging countries (frontier markets). The articlepartially fills the gap in the literature on the subject. Research on the links between the stock market and the real economy can be found in developed and even emerging markets. However, there is a lack of research on this topic in the area of pre-emerging markets. That is why this article is devoted to the group of pre-emerging markets. Accordingly, the article examined the relationship between the situation on the stock market in year T and the future real rate of change in GDP, private consumption and investment in year T + 1. Firstly, a strong positive correlation was noted between the rate of return on the stock index in the year T and the real rate of GDP and its components in the year T + 1. Secondly, there is a consumer effect in the stock markets of all pre-emerging countries. There is also an investment effect in most of the countries studied. The strength of both effects is similar. Thirdly, participants in the pre-emerging stock markets are trying to confront reality with expectations. They welcome data on better than expected change in economic growth. Fourthly, negative links between the rate of return on equity markets and inflation were observed in the group of countries studied.

Keywords

• stock market
• stock returns
• real activity