The Effect of Stock Market Development on the Economy - Qatar - Case Study Example

The Effect of Stock Market Development on the Economy Introduction Stock market normally reactsdifferently to various factors that could range from socio-economic, political, to economic. There are factors that occur either within or without the economic system that normally affects the stock prices of quoted companies, to perform either negatively or positively. When interest rates and inflation rates are reduced, what follows is an increase in the stock prices, and an increase in the real GDP has a positive impact on stock performance (Basher & Sadorsky, 2006). The term stock market is a term that is generally used to refer to an organized exchange platform where shares and stock are traded. Both the rational and the irrational behavior of the investor normally explain the movement of the stock exchange. There are microeconomic factors such as profits, business growth and dividends announced, among others, that explains the returns from the stock market. On the other hand, there are also macroeconomic factors such as consumer price index, Gross Domestic Product, Inflation and Interest rate, which again explains the overall returns in the stock market. This paper is therefore aimed at discussing the effects of stock market development on an economy, and especially, the Qatari economy. It will also be aimed at discussing how certain macroeconomic factors such as inflation, interest rates and GDP affects the stock market performance (Chen, Roll, & Ross, 1986). GDP Deflator GDP is a broadly and widely used measure of economic output. Economic growth is measured in terms of an increase in the size of a nation’s economy. GDP is always referred to as the total value of the final goods and services that are produced within a country’s boarders in a given year. This is normally done without any consideration to the ownership of such goods and services. GDP, however, only measures final goods and services consumed by the final user, but not those that are used as output for other goods and services. Increase in GDP increases the living standard of a county’s citizens. According to a research done by Carstrom (2002), it was found that there is a relationship between future RGDP growth and the stock prices. To drive this point home, he gave two explanations to this effect. The first explanation stated that, due to the changes that might occur in information about the future course of RGDP may cause today’s price changes in the stock market. The second explanation stated that, changes in the stock prices, regardless that sources of such changes, reduces a firm’s asset position, thereby affecting its cost of borrowing. The firms will have a tendency of borrowing and investing less when the cost of borrowing is high for them. This will in turn slow down the rate of RGDP. Therefore, when there is a change of the information about the future course of RGDP, there may be a corresponding change in the prices of the stock market. It therefore means that, while stock prices are used in predicting future economic activity, the final causality is from the future GDP growth in the current stock prices. Inflation In simple terms, inflation is a situation in the economy where there is more money and few goods and services are chased using the more money available (Adrangi, Chatrath, & Sanvicente, 2002). Or other, there is much supply or availability of money in the economy, but with less goods and services to be purchased. This will mean that, small amounts of goods will be purchased using a higher price as more people will be willing to pay higher prices in order to access the same amount of goods. Therefore, in such a situation, there becomes no growth in the output of a country’s economy. Inflation is however caused by four factors including a situation when supply of money goes up, demand for goods goes up, supply of goods goes down and when the demand for money goes down. An increase in wage rate as well as an increase in the prices of raw materials will decrease the aggregate supply which then can also cause inflation. There was an economic thought by (Asogu, 1991), who stated that, inflation is a factor which is being used generally to distribute a situation of rapid persistence and unacceptable high rises of prices in the economy which results in the general loss of the purchasing power of a country’s currency. According to Asogu, this issue of inflation is one that causes a lot of discomfort to many people in the economy including investors, consumers, producers and even the government. It has become a common belief that inflation has a positive effect to a common stock. This is because of the increased returns that inflation brings to shareholders as the prices of products increases faster than the wage rate. This therefore brings some relationship between stock prices and inflation, where there is a positive relationship between the rising prices and the inflation rate. Therefore, when trying to assess the impact of inflation on the performance of stock prices, the relationship that would exist between the two issues would be that of a positive relationship between the variation of stock prices and inflation (Akbar & Samii, 2005). Consumer Price Index Consumer price index is a widely mentioned and quoted economic indicator that is used to measure the changes in the prices of goods and services to consumers. In some words, we can say that, it is what we pay for a basket of our daily needs. There is a direct relationship between inflation and the CPI, such that, when it is reported that inflation increased by a given percentage, it also implies the same thing that CPI increased with the same percentage. It is therefore to understand the relationship between CPI and stock markets in that, during a time when inflation is high so that interest rates are also high, hence follows the CPI, there are normally a difficult condition in the stock market. Any investment plans that are promoting diversification are normally preferred as the best for such periods and conditions. Explanation and Analysis Qatar Economy Qatar enjoys economic freedom of about 71.2%, which makes this economy to be the 3oth freest economy in the world in the 2014 economic index. The country is endowed with millions of barrels of proven oils deposits, which accounts to 85% of its total export revenues and over 505 of its GDP to depend on natural gas deposits. The country has a total estimated population of 1.8 million people whose GDP is estimated to be $102.211 per capita. Its growth rate was estimated to be 6.6% in 2012, and a5-years compound growth rate of 13.1%. it has a small unemployment rate of 0.5% with an inflation and CPI rate of 1.9%. its foreign direct investment (FDI) accounts for $326.9 while public debt remains at about 37.8% of the country’s GDP. Its natural gas deposits, that is oil and gas, has made this country, Qatar, to be one of the world’s fastest growing and higher per capita earning countries. There has been a recent increase in the oil and gas prices since 2008 that have helped to build Qatar’s budget and economy as well. There is something with the Qatar’s microeconomic indicators as they keep on getting better and better each day (Burmeister & Wall, 2009). The growth of its economy depends heavily on its oils and gas sectors. However, there is also a contribution to this economy brought about by the stock market development in Qatar. The consumer price index of Qatar has been reported to increase to 117.20 index points in just last month of April, 2014, from the 116.90 index point which was recorded in March the same year. The Consumer Price Index (CPI), was recorded to be 110.66 index points back in 2009 and remained around that point until in 2014 when it recorded the highest of 117.20 index points. In July, 2012, the country recorded the lowest Consumer Price Index of 106.60 index points as was reported by the Qatar statistics authority. This therefore shows clearly that, the stock market would gain value since, shareholders would receive high prices for their goods and services, hence the economy in terms of investment would be said to earn a lot of benefits. It also means that, the stock market of Qatar offers favorable investment opportunities that would benefit everyone including the consumers, investors, producers and even the government as a whole. The consumer’s would benefit in the sense that, when the Consumer Price Index is high, the consumer’s are able to get more value for each basket of goods and services that they purchase on a daily basis. This then translates into a higher or better standard of living. On the other hand, investors would also receive high prices for their goods and services; hence, they are able to receive high returns with increased prices as the prices increase more than the wage rate. With high consumer price index, the government is able to collect even more revenue in terms of taxes since more consumers will be encouraged to purchase more goods and services due to the increased value of the consumer’s purchase. This contributes to the improvement of the economy as the government is also able to provide good social services such as good social amenities, good roads and infrastructure, affordable education as well as affordable and quality medical services to its people, among others. The producers are also not left behind, as they will also benefit with the development of stock market which increases the consumer price index, hence, when the consumers are able to receive quality for the money they spend on a given basket of goods and services, it means also that, the producers also will benefit and they will also have a reason to produce even more goods and services to the market. Qatar statistics about GDP Deflator, inflation, and the Consumer Price Index Prices Last recorded Previous recorded Highest recorded Lowest recorded Recording unit + Consumer Price Index (CPI) 117.2 116.90 117.20 106.60 Index points + GDP Deflator 200.6 202.60 209.80 48.70 Index points + Inflation rate 2.80 2.60 16.59 -9.96 Percent + Looking at the GDP Deflator, it was recorder to be 201.60 index points in 2009, and 200.6 index points in 2014. On the other hand, according to World Bank records, the GDP of Qatar has always been on the rise with the most recent data being that of the GDP of 2012 that was recorded to be $183.38 billion. This represented 0.3% of the world’s total GDP. It therefore shows that the stock market must be well developed and contributing to the growth of the economy of this country. Issues such as the cost of borrowing by firms in the stock market must be favorable so that the firms are able to borrow easily and more in order to bust their investments. This translates to a higher rate of saving which shows that the Qatar economy is a mature economy with over average of the employees having high disposable income which can necessitate good investment and savings. With high GDP, the stock market is perceived as one that has the ability to expand as it has a lot of resources and good earns good interest rates. These are some of the factors that would allow the stock market to expand, and at the same time, improve the economic conditions of the country as there will be induced low cost of borrowing, high interest rates earnings on savings as well as more and well paying investment opportunities. All these come back to improve the economic status of the country whereby standard of living will be one of the areas improved. Inflation has been recording very low percentages in this country, with the recent statistics showing a record of 2.80% in April this year. This has always helped in stock market as the low inflation rate ensures that, not only the shareholders and investors benefit from the market, but also the producers and the consumers get good value for the goods they present in the market as well as the money that the consumers use to purchase goods and services, respectively. Conclusion In conclusion, it is notable that Qatar is an economy that depends mostly on the oil and gas sectors. Its stock market does well and its development represents the development in the whole of the Qatar’s economy. It has the best macroeconomic indicators, that shows that, the country has a high GDP, high CPI and low inflation rate which then shows how the well the economy is built through the well development of the Qatar Stock Market. References Adrangi, B., Chatrath, A., & Sanvicente, A. (2002). Inflation, output and Stock Prices:Evidence from Qatar. Journal of Applied Business Research, 17(1), 61-76. Akbar, Y. H., & Samii, M. (2005). 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