When a country is facing multi-year economic crisis , inflation is skyrocketing to 741%, Interest Rates increased to 21.78% and the entire country is going through a very complicated tough situation, What do you think how the stock market would perform? Generally speaking, the stock market will reflect the economic conditions of an economy. right? But what if the the entire economy in crisis, stock markets created a historic bubble?
Venezuela’s Caracas Stock Exchange Index IBVC hit record 47,000 on last friday. Since the start of 2014 IBVC index had returns a whooping 1618% which should ideally reflect the economic boom of any country. We are told that stock market index are often forward looking but in this case despite continuing multi-year crisis, stock markets are in the formation of historic bubble. Year to date index made a gain of 48.34% and last 1 year IBVC index had gained nearly 200.33% and where the country’s annual GDP rate is decelerating at 18.6%
Venezuela Stock Index IBVC – (Log Scale)
Venezula Exchange Volume Skyrocketed between 2015-2016 Period
What made the Venezuelan stock market to go higher?
Venezuela’s stock market movement largely reflects the collapse of Venezuela’s currency, the bolivar. When a currency experiences strong and rapid depreciation, investors naturally turn to gold or foreign currencies to hedge against wealth erosion. With gold in short supply and strict capital controls imposed, middle-class families and investors are pouring into the stock market as a hedge against their crumbling currency.
Bloomberg reports ‘Foreigners are almost completely absent from Venezuela’s stock market because of the difficulty they would have getting money out of the country legally.’
Venezuela Interest Rate
Source : TradingEconomics
Will this bubble go parabolic further?
This is a impending bubble and the markets are largely driven by retail investors rather than by funds or asset managers. Bubble will start crumbling when investors find stock market index are getting toxic to invest further or when they find alternative safe haven investment vehicle to invest. Already volume are getting thin compared to 2015 and 2016 which indicates that less and less people are interested in participating at this juncture.