COVID-19 pandemic and stock performance: evidence from Sub-Saharan African stock markets.

Abstract

This study examined the impact of the COVID-19 pandemic on stock performance in sub-Saharan Africa utilising data from the two largest exchanges and two smaller exchanges in the region. While previous studies have primarily analysed the impact of the pandemic on overall stock market performance, this study investigated its prolonged effects from 2020 to the end of 2022, focusing on both sector- and firm-level effects. An event study methodology was applied to assess the impact of the pandemic outbreak and related events on stock returns, and Explainable Artificial Intelligence was employed to analyse the impact on stock volatility. The study also explored the role of firm-specific factors on stock performance during the pandemic and further investigated the possibility of constructing a factor portfolio that could enhance investor returns during crisis periods. The findings revealed that larger stock markets experienced more pronounced declines and higher volatility than smaller ones following the outbreak of the COVID-19 pandemic and related events. Although the pandemic disrupted markets, rising infections and deaths had no significant direct impact on stock performance in sub-Saharan Africa. Instead, government-imposed restrictions negatively impacted stock performance, while introduction of vaccination programmes helped to stabilise the markets. Although the sectoral impact of the pandemic varied, in larger exchanges, sectors that struggled were those impacted by supply shocks, whereas in smaller exchanges, sectors that faced demand shocks were most affected. The healthcare sector proved to be the most resilient, maintaining stability, even under strict government measures. Additionally, economic stability played a more crucial role, as inflation and exchange rate fluctuations significantly influenced stock returns, particularly in countries with high inflation. Firm-specific factors also shaped stock performance, with momentum stocks and stocks for financially robust companies demonstrating resilience while weaker firms struggled. The study’s findings also revealed that factor portfolios were more robust than traditional market cap-weighted portfolios, offering better protection to investors during crises. The study emphasised the importance of sector and stock diversification as a risk management strategy during crises periods. Governments are also encouraged to balance public health policies with economic stability to support stock market resilience in sub-Saharan Africa.