Impact of Interest Rate, Inflation Rate, and Oil Prices on The MSMs Returns - Research Paper Example

Impact of Interest Rate, Inflation Rate and Oil Prices on The MSM’s Returns Name Student ID Course Instructor Date Research Topic: To Test the Impact of Interest Rate, Inflation Rate, and Oil Prices on Muscat Securities Market Returns during the least 10 years 2005-2015. Aims This paper aims to investigate the correlation between interest rate, inflation rate, oil price rate, and the Muscat Securities Market (MSM) returns. The specific objective of the study is to evaluate the impact of the three factors on MSM. The factors are believed to result to the high fluctuation rates in Muscat Securities Market. Introduction The Muscat Securities Market (MSM) is the sole stock exchange in Oman. It was developed by the Royal Decree in the late 1980s to control and direct the Omani securities market and contribute in the setting up the Sultanate’s fiscal sector (Al-Jafari, 2012). The Muscat Securities Market, just like any other emerging market, is experiencing a new trading scenario. Various aspects such as interest rate, inflation rate and oil prices are believed to have had an impact on Muscat Securities Market Returns. Interest rate refers to the proportion of loan which is interest to creditors, basically articulated as the annual proportion of the withstanding loan. The benchmark interest rate in Oman was previously recorded as 1%. In the last decade, the rate has averaged 1.61%. In the year 2008, the interest rate hit the highest mark, 5%. The reports on interest rates of Oman are given by the central bank of Oman. Inflation refers to sustainable increase in the overall level of costs of products and services. It is estimated as the yearly percentage increase. As inflation increases, the amount of money owned buys lesser goods and services. On March 2015, the inflation of Oman was estimated to be 0.70%. (Al-Jafari, 2012). From 2005 to 2015, the average rate of inflation was estimated as 4.34%. In 2008, it hit 14.5% and the lowest was 0.3 in late 2013. Reports on inflation are given by the National Centre for Statistics and Information-Oman. Crude oil in the international market is at the moment costing $84 for every barrel, a drop from $110 in the last one year. The Ministry of Oil Oman has frequently persuaded oil dealers to review their expenses oil price has immense impact on the Muscat Securities Market returns. These variations of the above factors are suspected to have immense impact on the Muscat Securities Market returns as study seeks to study. Literature review Various studies have been conducted on the effects of inflation, oil price, and interest rates on the stock market in general, and similar aspects may apply for the Muscat Securities Market. Majority of these reports are contradictory which a few agree take a common stand. To begin with, changes in interest rates do not only affect the behaviour of customers and organizations but if affects the stock market returns. High interest rates result to low stock returns. Due to low interest policies, a lot of investors are worried that interest rates would go up and harm the stock market. When Fed increases fund rate, it does not have instant effect of the stock market. According to a study by Wright (2012), the direct effect is that banks can no longer borrow money freely and in turn, banks raise their interest rates for loans. This in turn affects the amount of money available for spending by consumers. Companies are also affected as they borrow money from banks for their normal business operations. One way of estimating the value of a company is by taking the total of all expected future financial inflow from it discounted back to the current. The stock’s price is achieved by dividing the total discounted financial inflow by the amount of the available shares. If an organization is observed to lower its expansion expenses or its revenue drops, the valued amount of future cash flows obviously reduces. In turn, it lowers the price of the organization in the stock market. If many companies face decree in their stock prices, the entire market goes down. Inflation rate can be categorized into expected and unexpected inflation. The impact of unexpected inflation are extensive harmful compared to expected inflation. From past reports on the effect of inflation on the stock market, the results are contradictory (Farka 2012). The conflicting results arise from putting into consideration various factors such as geography and time. Majority of reports argued that expected inflation can have either positive or negative impact on the stock market returns. However, unexpected inflation has not portrayed any decisive results. In times of low interest rates, inflation is high. Interest rates and inflation move hand in hand. During times of higher inflation, discounted cash flow increases. As a result, there is a positive relation between inflation and the stock market returns. However, a study conducted by Geetha, Mohidin, Chandran and Chong, (2011), showed that with inflation, purchasing power reduces significantly as the amount of money available can only purchase fewer products. For investors, inflation makes stock unattractive for entry. The price of dividend paying goods drop and possessing dividend paying stock in periods of inflation results to a drop in the stock prices, and generally the stock market returns. Also, in times of high inflation companies spend much on production cost hence low profits; hence, a decree in stock prices and eventually the stock market returns as a whole. A study conducted by Degiannakis, Filis and Kizys (2014) showed that oil prices in Omen and other countries are basically influenced by the demand and supply of the petroleum based goods. Every company has expenses for oil. Increase in oil cost lead to a reduction in profits. Consumer expenses are indirectly linked to oil. High price of oil leads to high transportation costs which in turn reduce the amount of money available for spending. It greatly hurts companies that purchases products to consumers as they observe increased costs with reduced revenue. When the prices of oil are high, oil companies fasten supplies. The production expense may be low which maintains high returns. Oil companies have a great impact on the entire stock market returns, which are stabilized beside the harm of the other companies. According to the study (p.40), the increase in production costs, which is linked to high oil prices, leads to high prices for goods and prices resulting to inflation. High costs harm the profits of companies which in turn harms the entire stock market. On the other hand, some reports argue low oil prices would have significant negative impact on the stock markets while others state that low oil prices are linked to low production rates; hence, low products for goods and services (Degiannakis, Filis and Kizys, 2014). Low prices for goods and services means an increase in overall sales and the total profits made by companies which has a positive impact on the stock market returns. From previous research, it is possible that Muscat Securities Market returns are greatly affected by inflation, oil price, and interest rates. However, there is inadequate information that gives insights on aspects’ impacts on the MSM’s returns. The inadequacy inhibits the possible predictability of monthly interest rate, inflation rate and oil prices’ effects on the MSM and Oman’s economy. Lack of prediction is attributed to the ongoing negative impacts of oil prices’ crunch on Oman’s economy. Since MSM represents Oman’s trending economical interests, it is imperative to conduct a study on the impacts of interest rate, inflation rate and oil prices on the MSM’s returns. The study’s findings will provide recommendable prediction guidelines that will prevent negative impacts of interest rate, inflation rate and oil prices on securities markets and Oman’s economy as a whole. Methodology The hypothesis of the study is that inflation, interest rates, and oil price has significant impacts on the Muscat Security Market returns. The analysis process will use a quantitative approach of collecting and analyzing data. The information used for this study will be obtained from the Muscat Securities Market and from Omanis authorities and stock trading values will be expressed in Omanis Riyal currency. The process of data collection will include sending electronic mail to the Muscat Security Market and Omanis authority so as to acquire approval to use the company’s data for the study. Thereafter, the team will visit the MSM where the required data will be provided. This particular study will select data based on monthly time-span from the year 2005 to 2015. The monthly time-span provides ample period of determining movements of trading prices with regards to movements of product volumes. For instance, a week’s large trading individual stocks tend to produce overwhelming returns in following month. The study will incorporate over 144 observational data samples. The variables of the study will include inflation rate, oil price, and interest rates against the stock market returns in Oman. Data analysis and hypothesis testing will be carried out by use of linear regression of SPSS. Thereafter, a conclusion will be reached. Graphs will be used for comparative analysis on the effects of the three factors on MSM returns. Conclusion This research study’s intention is to evaluate the possible effects on oil price, inflation, and interest rates on the MSM’s returns from the year 2005 to 2015. The study will use the results from an assessment on the influences of monthly-based interest rate, inflation rate, and oil prices. This discussion is a key undertaking in providing the impacts of the aforementioned variables on the MSM’s returns. From previous researches, inflation, oil price and interest rates have immense impact on the MSM returns. In fact, the current crunch in oil prices is causing devastating effects on the stock market of many oil producing countries, including Oman. These effects resulting from these factors call for immediate evaluation of such changes on the returns’ stability. The study will facilitate the adoption of predictability standards of minimizing the probable negative effects. As a result, the minimization can prompt the stabilization of stock market returns and restore the country’s economy. That is why this particular research is important in the immediate contemporary context. In order to ensure the reliability of the research findings, the study relies on empirical quantitative approach. The quantitative nature is depicted in the proposed methodology. The methodology entails the collection and analysis of data. With regards to data collection, the methodology uses the MSM’s recorded price indices and product volumes. The records are found in the MSM’s data base ranging from 2005 up to 2015. On the other hand, the data analysis approach relies on comparative tables for distribution of variables’ data. Further calculations are conducted on distributed variables’ data to provide specific standard deviation values and Pearson correlation coefficients. Finally, the research can use these values in discussing the impacts of interest rate, inflation rate and oil prices on the MSM’s returns. Bibliography Al-Jafari, M. K., 2012. An Empirical Investigation of the Day-of-the-Week Effect on Stock Returns and Volatility: Evidence from Muscat Securities Market. International Journal of Economics and Finance, 4(7), p141. Degiannakis, S., Filis, G. and Kizys, R., 2014. The effects of oil price shocks on stock market volatility: Evidence from European data. The Energy Journal, 35(1), 35-56. Farka, M., 2012. Monetary Policy Effects on the Relation Between Inflation and Stock Returns. Policy Studies Journal, 234-255. Geetha, C., Mohidin, R., Chandran, V. V. and Chong, V., 2011. The Relationship Between Inflation And Stock Market: Evidence From Malaysia, United States And China. International journal of economics and management sciences, 1(2), 1-16. Wright, J. H., 2012. What does Monetary Policy do to Long‐term Interest Rates at the Zero Lower Bound?*. The Economic Journal, 122(564), F447-F466. Read More