How will the Earthquakes in Europe affect the Stock Market?

While earthquakes are typically associated with natural disasters, their impact extends beyond the immediate aftermath. They can create economic ripples that can last for years.

The stock market is a reflection of the overall health of an economy.

Like any black swan event, earthquakes can impact that health in several ways. 

However, the effects of earthquakes on the stock market can vary greatly depending on whether you adopt a short or long-term view.

AN IMMEDIATE CRISIS

In the short term, earthquakes cause significant disruptions to businesses and infrastructure, leading to lost revenue and increased costs. 

In turn, this can result in a decline in stock prices. Due to panic and fear, investors become concerned about the ability of companies to maintain their profits in the wake of the disaster.

For example, in the three days that followed the devastating earthquake, the BIST 100, the index that tracks the performance of the one hundred largest publicly listed companies in Turkey, plunged by 15%. 

The BIST 100 is down 20% YTD.

Understandably, investors are fleeing an already fragile economy. In 2021, the Lira lost 44% of its value; in 2022, it lost an additional 21%. In January 2023, annual consumer price inflation was 57.7% higher than a year before.

As a result of this instability, the World Bank predicts that Turkey's GDP will grow by only 2.7% in 2023, down from 4.7% last year.

Turkey’s double digit inflation was already a worrying factor before the earthquakes hit

Since Turkey is struggling economically, the impacts of the earthquake on its stock market are more severe than in other European areas. Naturally, investors are likely to be more cautious about investing in a region already facing challenges.

Beyond Turkey, the Spanish IBEX 35 is another stock market that investors thought could indirectly be affected by the earthquakes. 

Indeed, up to 70 Spanish companies, including BBVA, Mapfre, and Gestamp, exported more than €6 billion worth of goods and services to Turkey last year. 

In particular, banking giant BBVA, which has over €9 billion invested in its subsidiary Garanti, will assess the impacts of the earthquake on its business.

Despite this exposure, the IBEX 35 has barely been affected by the earthquakes.

Similarly, the French CAC 40, the UK FTSE 100, and the German DAX were barely affected by the earthquake because the companies listed on these exchanges had limited exposure to Turkey.

A TEMPORARY CORRECTION?

In reality, the impact of earthquakes on the stock market can be short-lived because investors focus on long-term growth potential.

In many cases, stock markets may recover relatively quickly as investors become more confident in the ability of the region to recover and rebuild.

Indeed, markets are forward-looking and investors know that in the long run, earthquakes can also lead to significant investments in rebuilding and recovery efforts. 

The BIST100 has experienced tremendous growth over the past few years.

For example, a few days after the earthquakes hit, Turkish President Recep Erdogan promised to rebuild the impacted communities in just one year. Investors expect the Turkish government will allocate plenty of resources to help communities recover and rebuild. 

Erdogan has vowed to rebuild the devastated communities in record time.
Ultimately, this should boost the country’s stock market.

In parallel, corporations will invest in new infrastructure and technologies. They will thrive and generate substantial profits. Additionally, the ripple effects of their success will spread and potentially help the Turkish economy recover from its recent slump.

Is now the time for long-term investors “to be greedy when others are fearful”?

In total, Bank of America believes that rebuilding the damaged infrastructure in Turkey alone could exceed $5 billion.

This increased investment can stimulate economic growth and boost the markets as investors seek to capitalize on the region's growth.

The information in this article is well-researched and factual. Still, it contains opinions also, and IT IS NOT FINANCIAL ADVICE and should not be interpreted as such, do not make any financial decisions based on the information in this article; we are not financial advisors. We are journalists. You should always consult with a professional before making any investment decisions.