The impact of COVID-19 on the South African stock market: a sectoral-level analysis.

Abstract

The novel 2019 Coronavirus (COVID-19) quickly spread all over the world. It dramatically affected the financial markets in almost every country, creating substantial uncertainty permeating every aspect of life and business. Investors and markets are facing a high degree of volatility regarding the physical and financial impacts of the virus. Behavioural Finance studies are steadily emerging, highlighting the impact of investors' emotions on their investment decisions in stock markets during macroeconomic events. Existing research of the pandemics impact on volatility and/or stock returns have predominantly focused on the overall performance of the South African stock market with limited evidence on the industry specific impact. This study therefore aims to analyse the impact of COVID-19 on the 8 largest industry sectors of the Johannesburg Stock Exchange (JSE). In particular, the study attempts to evaluate the impact of COVID-19 on industry performance, stock returns, trading volume, stock volatility and COVID-related investor sentiment. These research objectives are analysed using a variety of different methodologies, such as an event study, and GARCH (1,1) model. With existing global studies indicating a rise in the importance of industry specific factors which aid in the pricing of equities, a study of this sort is imperative to the South African investor. The sample in this study consists of daily data from the 8 largest sectors on the JSE and spans the period 1 January 2017 – 30 August 2022. The selected period ensured to include stock market performance before the COVID-19 outbreak, allowing a more accurate comparison of industry performance. The results of this study suggest that the COVID-19 pandemic had a significant impact on all sectors of the JSE included in this paper, both in the short-term and long-term. Some sectors gained from the impact of the pandemic and others suffered - with the number of the sectors negatively impacted outweighing the number of sectors positively impacted. Furthermore, the findings of this study suggest significant implications for investors and policymakers. For investors, it is suggested that they be cognisant of how industry sector idiosyncrasies affect company performance during crises. Investors who seek a healthy return on their investment should avoid investing in sectors that are more vulnerable in times of crisis and negatively impacted by the COVID-19 pandemic. However, risk-seeking investors may opt to invest in higher-risk sectors since these stocks may generate higher returns due to an increased market risk premium. For policymakers, the findings of this study indicate that the implementation of strict lockdowns in times of crisis be carefully implemented as many sectors were not able to recover from the implications brought on by this policy, crippling further operation of many companies. Regulators should be cautious of the effect of such policies on industries and the economy as a whole. Policymakers must customise such policies based on the characteristics or nature of each market sector.