On markets: What’s left of my $100 after the crisis is over?

The AIC’s first live webinar on 7 April 2020 looked the economic impact of Covid-19 in Indonesia, and included a number of comparisons to previous crises such as the 1998 Asian Financial Crisis.

During the webinar, panellist and AIC Indonesia Director Kevin Evans compared the current situation with 1998, albeit at this early stage of Covid-19’s impact. The following is an excerpt from Kevin’s comments and slides during that dialogue, where after a look at current shifting projections he employed an original method for summarising the impact on markets of a given crisis.

Downgraded projection after Q1 2020

[Kevin:] I think the first point to note is that we’re now seeing an unprecedented downgrade in projected rates of growth. I’ve done a little bit of work with the G20 economies working on some work put together by The Economist Intelligence Unit. They were projecting in late 2019 that this year we’d have a kind of a balmy global expansion of 2.3 per cent. This has now been revised within a couple of months to say global contraction of 2.2 per cent. That’s a tremendous change in an incredibly short period of time – a 4.5 per cent shift basically in global projections. Now the G20 nations representative 85 per cent of the world economy so that’s why I’ve given a bit of a focus there.

You can see on the chart here that the regions of the Americas and Europe are looking to see the sharpest downgrades in growth. They’re suggesting at this stage that the only areas expected to see any sort of growth are the three big Asian nations of China, India and Indonesia. However, I personally think that there’s still more prospects of a risk on the downside, not the upside.

Markets during the Covid-19 financial crisis

Twenty years ago when I was on the stock market, I created a kind of a snapshot way of identifying which country was most badly affected in terms of what lost wealth that society suffer as a result of the Asian Financial Crisis. So I’ve used the same kind of formula here, basically taking the stock exchange indices of major market economies around the region, converting them into US dollars, taking a starting point, being before a crisis emerges, and then sometime later. So the picture you’ve got there in front of you now is only three months into this crisis. So we’re not over this yet: this isn’t the end of the game.

What it’s actually showing is just how much you’ve lost. So if I put [USD] $100 into each of these markets just before the crisis event, so at the end of last year, so before anybody was seriously looking at the impact of Covid. So looking at all of these market economies across the region, what you’ve got left now from my $100. I’ve still got $82 in Japan. When you’re looking at the other end, the most effected as at the end of March was actually Australia, Thailand and Indonesia. So we’ve lost $35 in Australia. We’ve lost $39 in Indonesia. We’re still in the middle of the crisis so these numbers will change and change rather sharply. But it’s interesting to see just what we’re suffering now.

Markets during the Asian Financial Crisis

The other slide looks at the end of the Asian Financial Crisis, which is a lot more shocking, particularly from an Indonesian perspective. This chart shows what happened. Prior to the beginning of the Asian Financial Crisis I bought my my $100 on each of these markets and then I sold them about a year and a bit later, so after the dust and settled and so forth … Australia did the best out of that … still with 74 per cent of their wealth. Indonesians were left with $9.

Now in a practical sense, obviously markets are hyper-responsive, and often tend to overreact of course, but if you look at things like property prices, even those declined dramatically.

My personal experience: I was dumb enough to buy a property here in Indonesia just before the [Asian financial] Crisis, thinking this will pass no problems.

I think [my house] was about $150,000 American [then in September 1998] it was left at about $40,000. So that was actual real prices, but what I’m showing you here was actually on the equities market, which are much more responsive to these kinds of changes.

So the impact is significant in terms of what that actually leaves a society. And the devastation Indonesia suffered during the Asian Financial Crisis was reflected there and so many lessons were learned from that period. Interestingly enough, when the Global Financial Crisis struck 10 years later, a lot of the fundamental flaws in governance, fundamental flaws in finance systems and integrity systems had been redressed to the point that actually Indonesia, and Australia too in many respects but particularly Indonesia, sailed through the Global Financial Crisis, barely skipping beat. So the losses that you saw [in the GFC] were nothing like [the AFC].

But this time, we are still fairly early in, and it seems that we’ve got some bad times ahead of us.

Full webinar coverage: An insightful hour on the economic impact of COVID-19 in Indonesia

‘Covid-19 and the 2020 financial crisis’ – Read Kevin Evans’ full report