On August 5, global stock markets plummeted, causing the world’s largest companies to lose hundreds of billions of dollars. The reasons for this included the risk of a recession in the United States, particularly due to news of an increase in unemployment, and the Bank of Japan’s raising of interest rates amid increasing average wages. At the same time, experts emphasize that what is happening to the markets is a correction and that additional reasons for the fall include the artificial growth of large companies’ shares. 

AIN has figured out what happened to global markets, what possible consequences investors should expect, and how these fluctuations affect Ukraine. 

The fall of the markets on August 5: background

Financial markets expert Nataliya Shyshatska explains to AIN that the fall of the markets was preceded, in particular, by the Bank of Japan raising interest rates to 0.25% per annum on July 31. 

The Bank raised the rates for the second time in a year. The previous increase occurred in March, from -0.1% to +0.1% per annum. The change was prompted by a hike in the average wage by 5.28% at the request of labor unions. The wage increase was the largest in Japan in the past 33 years.

“Due to the increase in the interest rates, speculative investors who received cheap loans in Japanese yen to invest in high-yielding assets, began to exit technology companies massively,” explains Shyshatska.

A few days earlier, on August 2, 2024, the US Department of Labor released its monthly Employment Situation Summary, according to which the unemployment rate rose to 4.3% in July. The number of unemployed people increased by 352,000, which totals to 7.2 million. In the same period of the previous year, the unemployment rate in the US was 3.5%, with 5.9 million jobless Americans.

The situation in the United States deteriorated in June 2024: for the first time in 29 months, the unemployment rate reached 4%. At the same time, annual wage growth slowed: for the first time in almost three years, it fell below 4%.

“The unemployment data in the United States was higher than expected, and this is an indicator of a ‘cooling’ of the American economy,” Lyubomyr Ostapiv, founder of the Family Budget social project and partner of iPlan.ua, comments to AIN. “The release of this data resulted in panic Monday sales in the Japanese and American markets.” 

Shyshatska adds that indices began to decline against the backdrop of a global stock sell-off — first on the New York Stock Exchange and then on Asian and European stock exchanges. 

Situation in the world, August 5, 2024

USA

  • The Dow Jones Industrial Average fell by 2.2%, the Nasdaq Composite by 2.8%.

  • S&P 500 fell by 3%, the worst performance of this index in the last two years.

  • The fall in the shares of tech giants Nvidia ( by 14%) and Apple ( by 8%) caused a loss of about $635 billion in their market value. Amazon ( by 8.79%) and Intel ( by 26.06%) shares fell due to quarterly reports and worse-than-expected results. Shares of other members of the “trillionaire club” — Amazon, Microsoft, Alphabet, Google, Meta Platforms, and Tesla — also fell.

  • The volatility index (VIX) also broke an anti-record: it reached its highest level since March 2023 — 23.39%. 

“The VIX, also known as the ‘fear gauge,’ went up, then down, and there may be more such jumps,” Ostapiv said. According to him, the index fluctuations and investors’ uneasy mood may continue until the upcoming US elections in November this year. 

Europe

Asia

  • The Japanese stock market faced its biggest collapse since Black Monday: On October 19, 1987, the Nikkei index dropped almost 15%. In early August 2024, the Nikkei 225 index fell by 12.4%.

  • Taiwan’s Taiex stock exchange fell by 8.4%, South Korea’s KOSPI recorded its worst session since 2008 - a drop of 8.8%, and Hong Kong’s Hang Seng fell by 1.46%.

Collapse or correction?

Despite the recent events being the worst three-day drop since June 2022, experts advise against calling them a market collapse.

“A collapse is a big word,” Vitali Gorovyi, founder of InSoft.Partners, comments on the fall of the markets.

He cites the following figures: As of mid-Monday, August 13, US time, one of the leaders of the fall, Japan’s Nikkei 225, has already risen higher than at the close of the session on Friday, August 2 — the Nasdaq repeated its dynamics. The Dow Jones did not rise to the level of the session close on Friday, August 2, but almost reached those levels.

Andrii Dligach, head of Advanter Group and founder of Kyiv Foresight Foundation, notes that what is happening now is not a catastrophe but a correction of the markets caused by the overvaluation of assets, primarily in the tech sectors. 

“The most appropriate analogy would be with the dot-com bubble [an economic phenomenon of the late 1990s and early 2000s characterized by a sharp rise in the value of shares of Internet and technology-related companies and their subsequent rapid decline - ed.], which lasted about 30 months — when the S&P 500 lost almost half of its value,” he says.

According to Dligach, the current correction is mainly due to the slow growth of large companies’ real financial performance.

“Apple, Netflix, Nvidia, Amazon, Meta, Alphabet, Tesla, and Microsoft are powerful, ecosystemic, and promising, but there are no breakthroughs. Intel generally reports losses, which has led to the fact that it is already cheaper than the ‘newcomer’ OpenAI,” he notes.

 

Dligach cites AOL, Dell Computer, and Sun Microsystems as examples of companies that once collapsed, in particular, due to the inability to adapt to new consumer needs. Large companies currently experiencing a decline in value or potentially will have a lower value in the future need to work on innovative development solutions. 

He also adds,“This time, the drop is not catastrophic. However, it is an important signal for those companies that no longer impress as they used to. So, Apple and Netflix should be ready. For example, Warren Buffett’s Berkshire Hathaway has already halved its stake in Apple.” 

Mykhailo Merkulov, founding partner of Green Recovery Fund, does not consider the situation on August 5 to be a collapse either.

“Markets cannot grow continuously, and they need to be corrected from time to time. Sometimes by 10-20%, and in a recession, it can reach 30-50%,” Merkulov explains to AIN. 

According to him, it is better to prepare for sudden falls and stabilizations shortly. Still, market volatility is determined by the fact that most trading is now done with the help of algorithms and robots.

The situation on the markets after the fall

  • Last week, Asian stocks began to recover gradually: Japan’s Topix index rose by 1%, South Korea’s Kospi by about 1.5%, and Hong Kong’s Hang Seng by about 1.5%. 

  • On Wednesday, August 7, the Nasdaq showed a drop, but the next day, it rose by 2.9%, the highest daily gain since February 2024.

  • On August 9, the Topix and Nikkei 225 indices rose by about 1%.

How have the fluctuations affected or will affect financial markets in Ukraine?

“To put it briefly, it won’t,” comments Nataliya Shyshatska, explaining that the stock market in Ukraine de jure exists but is de facto illiquid. “Even before the full-scale invasion, foreign investors invested mainly in domestic government bonds.”

She believes that among the reasons for the reluctance to invest is the insecurity of private investors from raiding and corruption. Since February 24, 2022, military risks have also been added to these reasons.

Other experts also discuss the impact of the country’s situation on investments. They agree that there are many reasons why Ukraine is not viewed as an investment market, and the full-scale war started by Russia is only one of them. Among the most significant are corruption scandals, conflicts between the government and businesses, and public accusations against high-ranking officials.

“The ongoing war in the country, uncertainty about the future, and public scandals actually keep the value of Ukrainian companies in the eyes of Western investors somewhere close to zero,” says Vitali Gorovyi, advising against taking the isolated cases of investment in the country over the past year as a trend. “For external trends to start affecting Ukraine, we need to deal with internal problems first, besides the war.”

Another reason why Ukraine is not considered as a possible country for investment is the low profitability of Ukrainian projects, explains Mykhailo Merkulov.

Despite the fact that Ukraine can now offer a large recovery market of about a trillion dollars, according to Merkulov, investors can receive a 15-25% return, taking into account the significant costs of protecting their business.  

At the same time, there are issues with the quality of Ukrainian projects. “It’s not just about profitability, but also about transparency, structuring, management, and technology,” Merkulov says.

Despite the lack of a direct impact of the global market downturn on Ukraine, Ostapiv explains that any problems in the US economy will mean less aid to the country. However, he adds that the United States is currently facing no serious problems that would significantly affect aid to Ukraine.

“All aid to the country comes from government institutions, not private investors. This means that the impact of speculative fluctuations in the financial markets on the allocation of financial aid is minimal,” concludes Nataliya Shyshatska.

Investment attractiveness of Ukraine 

  • According to the European Business Association, in the second half of 2022, Ukraine’s Investment Attractiveness Index recovered to a pre-COVID value of 2.48 points out of 5, compared to 2.17 points in the first six months of 2024. 

  • In 2022, Russia’s full-scale war against Ukraine topped the list of factors that negatively affected the investment climate. Attacks on the Ukrainian power system and corruption followed it. 

  • Among the positive changes, business leaders noted the granting of Ukraine the status of a candidate for accession to the European Union, the abolition of duties and quotas on Ukrainian exports, and the transport visa-free regime with the EU.

  • In 2023, the index dropped to 2.44 points out of 5. Despite this, the number of top managers who considered investments in Ukraine profitable doubled. The number of respondents who believed the country’s investment climate to be “extremely unfavorable” decreased (from 37% to 24%). 

  • According to the National Bank of Ukraine, foreign direct investment in Ukraine’s economy amounted to $55,786.6 million as of March 31, 2024. 

  • The primary investor countries include Cyprus (31.6%), the Netherlands (20.8%), Switzerland (4.2%), the United Kingdom of Great Britain and Northern Ireland (4.8%), Germany (4.3%), Austria (3.5%), Luxembourg (2.7%), and France (2.6%).

What should (not) investors do in times of uncertainty?

Among investors’ common missteps, experts list emotional decision-making, such as selling shares due to market downturns and lack of asset diversification.

“The most common mistakes are rash actions,” says Mykhailo Merkulov. He advises not to panic and try to prepare for any situation: diversify assets and calculate the main significant risks and actions if they occur.

Another mistake is to put investments on hold and wait for the right moment, comments Lyubomyr Ostapiv, explaining that this was a common strategy of investors after the start of the full-scale invasion.

According to Ostapiv, you should also consider your risk appetite and not spend most of your time tracking the markets. “The main funds are earned in business and profession. The stock market is a place where you can protect yourself from inflation and increase your capital,” he notes.

“When diversifying a portfolio, a smaller share should be allocated to speculative assets, such as startup stocks and cryptocurrencies,” says Nataliya Shyshatska. “Ideally, you should invest in these assets so that it will not be painful to say goodbye.” 

Nataliya Shyshatska lists US Treasury bonds and gold as reliable assets. “People started investing in gold as stock indices fell. Its price has now reached $2,268 per troy ounce.”

She also emphasizes the importance of understanding and tracking the impact of reports and announcements by national central banks, the Federal Reserve System, and US departments on asset price growth or decline.

“We are entering 10-20 years of turbulent times. We need to be prepared for anything: market crashes, recessions, regional or global wars, climate or man-made disasters, pandemics,” says Mykhailo Merkulov.” It will be bad, of course, if several of these factors work simultaneously, but there is also such a possibility.”

Merkulov advises having a plan of action for any of these situations and basic risk management for asset storage: “No one has come up with a better strategy than diversification by geography and asset class.”