The impact of macroeconomic variables on stock market performance in South Africa

Abstract

A well-functioning stock market is regarded as a reflection of a working economy. The stock market raises primary capital by rechannelling cash resources into productive economic projects aimed at building the economy while enhancing jobs and wealth creation. The South African economy has for the past decade been affected by different macroeconomic challenges which subjected the bourse into different risk factors, most specifically, the systematic risk factors. It is against this backdrop that this study aims to provide a critical review of the impact of macroeconomic changes on stock market performance in South Africa. This study used the Financial Times Stock Exchange (FTSE) and the Johannesburg Stock Exchange (JSE) top 40 index as the stock market performance benchmark, using time series quarterly data covering the period spanning from 2008 to 2021. Seven macroeconomic variables namely: economic growth, interest rate, inflation, money supply, exchange rate, crude oil prices and industrial production were used in the study. A multifactor regression model based on the arbitrage pricing theory was used to estimate the impact of each variable on market performance. Furthermore, the Ordinary Least Squares (OLS) method was used to establish the relationship between stock returns and macroeconomic variables. The study findings shows that economic growth, industrial production, and exchange rate affect stock market positively while inflation, interest rates have a negative impact. The implication of these results is that the government of South Africa should craft policies that increase the Gross Domestic Product (GDP) and industrial production to positively influence stock market performance, while policies to reduce inflation are recommended.