How the global recession affects investor behaviour

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Executive Summary

This project aimed at getting the true picture of what happened during the global recession of 2007-2009 and how the investors reacted to it. It focuses on the causes of the recession in terms of whether it was the government policies on financial services or market forces. Investor behaviour during the recession period was important to this study and it was the core of the research work. In order to understand the behaviour of investors during the recession period, the research approaches secondary research to acquire its data and findings. From the data, these investors were active throughout the global recession period, and they suffered the effects of the situation back then. They were thus the best-placed respondents for a survey that aimed at knowing investor behaviour during the global recession of 2007 to 2009. The use of desktop research was aimed at getting a second-hand feel of direct answers from the investors to make the analysis reliable.

The study found out that most investors were affected by the economic meltdown in 2007 and they were caught unawares. They only reacted to a situation that they had not foreseen in the first place. Most of the investors in the securities sector withdrew from the business as the market was dwindling. The housing sector was the hardest hit by the recession and it was a major cause of the problem. Investors blamed the housing policy for creating an economic bubble, which burst and led to the slowdown in the GDP. 49 out of 94 respondents claimed that the government was responsible for the recession, while the rest believed that the market forces were responsible. This shows that the government policy of credit reduction to enhance housing affordability played a role in the global recession.

Table of Contents

Executive Summary. 2

Project Aim and Objectives. 4

General Objective. 4

Specific Objectives. 4

Project Approach. 5

Literature Review.. 6

Critical Evaluation and Analysis. 9

The Business Case and the Environment 9

Findings and Analysis. 12

Discussion. 16

Conclusion. 19

Recommendations. 20

Future Research. 20

Project Aim and Objectives

The aim of this project is to find out the effects of global recession on the behaviour of investors in business today. Globalization is the newest business platform and the largest available today, with more investors going across borders. In the process of going across the borders, investors are exposed to various macro environmental factors in the market. Different countries have varying economic levels of development. This paper looks at the global economy as a single marketplace where there are similar effects from the macro environment. Economic recession affects many parts of the world at the same time, meaning that investors are under similar problems. By looking at the effects of recession on investors worldwide, this paper will be able to shed more light on a topic that has few literature works. Therefore, this paper will contribute towards the understanding of the negativities of global recession on the behaviour of investors.

The importance of economic development and stability will be discussed in this paper. This will be in relation to the decisions that investors make regarding the current economic status. This paper aims at looking for this information from investors who are currently investing, or were investing during the recent global recession period. This information would be of use in the discussion of the topic, and it will help in making conclusions. It is the aim of this study to contribute towards similar academic discussions on the topic of investor behaviour and global recession.

General Objective

To find out how the global recession affects investor behaviour

Specific Objectives

  • To determine the causes of global recession
  • To determine the effects of the global recession on economic development
  • To determine the effects of the global recession on decisions made by investors

Project Approach

This project is going to use a secondary research via desktop research to get answers to questions that are important to this research. The desktop or secondary research will search information on investors in different fields, including real estate and other forms of investment like in jewellery. The secondary research approach will be based on scenarios where it would have been previously deemed that the respondents had been asked direct questions that were succinct but to the point. Therefore, the research’s information will be purely from credible sources such as books, peer –reviewed journals, etc. This method ensures that for any secondary source used, they must be credible for academic and research purposes.

The data that was retrieved from the secondary sources was used to analyse the results from a hypothetical actual scenario in order to give the study a reliable point of argument. The data gathered therefore was presented in the form of graphs, tables and charts to enhance an understanding of the findings. These findings were related to the topic of this research work in various ways. The questions posed at any level during this desktop research were related to the objectives of this study in various ways. This was to enhance the originality of this work and bring out a new solution to the discussions related to this topic from the researcher’s point of view. The success of any research is to ensure that the results are original and provide a solution to the study objectives. This approach was taken by the researcher to enhance the success of this research work.

Literature Review

A global recession is usually a period where there is an economic slowdown in the entire world (Yang, 2012, p.211). There are many times when the global economy is not doing well, but there are specific times when it is too slow. The International Monetary Fund looks at how fast the global GDP is growing and notes whether there is a notable economic recession or not. Global recessions occur under rare circumstances, but when they do, the effects are so much that the entire world feels it. The global recession of 2007 to 2009 was one of the worst times since the great depression in the 20th century (Kaushal, 2010, p.105). It started with the United States with a sudden set of negative reports in the financial systems (Briguglio and Piccinino, 2012, p. 184). The markets were not responding in the normal way and services, and goods slumped in prices to the extremes (Nabli, 2011, p.27). The effects of the global recession spilled into other countries in Europe before affecting other parts of the world.

Global recession affects many parts of the economy and the poorest people usually suffer the most as they feel the pinch the most. The Developing nations were the most affected by the global recession (World Bank and IMF, 2009, P.167). The factor that leads to a total turn of events is the shock that is brought by the economic recessions. The 2008 recession happened in a quick manner and found many people unprepared for all the eventualities that come with it (Yi and Johnson, 2010). The banks were not ready to lend in abundance at the beginning of the recession and governments were busy trying to keep their valuable companies in the business. Financial packages were given to companies in a bid to enhance their performance in the market.

The global recession of 2008 to 2009 was tough on the economy, affecting both the investor and the client. Businesses were not able to operate as perfectly as possible as the prices had to stay high while the PPP was down (Dwivedi, 2010, pp.453-454). With a low purchasing power, there it should be difficult for businesses to make profits, and many enterprises ended up shutting down. The dilemma during the economic recession was to save the people while also saving the market players. The demand for financial assistance during global recession in the US and parts of Europe, was high. The banks were overwhelmed and governments had to provide economic stimulus packages to correct the situation. Everything was headed for the negative and it was not conducive to do business in the hit countries around the globe.

Investor behaviour during the global recession was under the effect of an abrupt change in the global economy. Investors were in a state of shock during the global recession and many did not know the right way out, or had not decided on a perfect solution. One thing that many investors did during the economic recession was to reduce financial risks as much as possible (Sharma and Pandey, 2010, p.2). The loss of faith in the economy usually leads to clients spending less on the market. The result of this is that there will be little to attain from doing business, thus a falling GDP. This is how the global economic crisis of 2007 escalated and spread to other parts of the world. However, before this, there was a perfect economy, which seemed to be promising investor a bright future. The US economy was strong during the period that came before the global recession (Cynamon, Fazzari and Setterfield, 2013, p.8).

A perfect economic growth in the period before the economic recession led the investors to make a great mistake. They became over-confident in their investments. They were acquiring property and busy trading their shares via the stock market. Investors were acquiring property and trading in anticipation of higher price values due to the improving global economy. During that period, the rating of securities was going up and the future was getting brighter for the investors by the day. The credit ratings during the period before the global recession showed that everything was all right prompting investors to act in an overconfident manner (LaBrosse, Olivares-Caminal, and Singh, 2011, p.4). This overconfidence led to unpreparedness, and when the economic recession hit, there was a shock (Higgins, 2013). Making decisions based on past records was a dangerous thing to do for the investors. It was also the behaviour of many investors to take part in mutual fund management, which made them act in a collective manner. Collective thinking led to the generalisation of facts, which enhanced the vulnerability of each investor in the event of the global recession.

Securities during the global recession period became complex with time. However, inattentive investors were too busy looking at projections to see the main picture of the situation. The problem was that the agencies responsible for rating credit were misguiding the investors by overrating the credits (LaBrosse, Olivares-Caminal, and Singh, 2011, p.4). This made the investors only look at other things and pay little attention to the effects of a negative eventuality.

The effects of the global recession on the economy were against the normal operations for investors. Prices were falling and stock prices too followed the suit (O.E.C.D.D, 2013, P.31). Banks started cutting down their interest rates to enhance more borrowing. Gold prices had gone down, and this affected a large portion of investors in the United States and other parts of the world (Mirhayardi, 2013). One factor that led to certain behaviour from investors is their ability to tolerate risk and their readiness to invest in stock. The stocks were falling at the time of the recession, and this made investors worried about taking part in stock trades. Investors were getting out of the stock business for other ventures (“European Financial Review”, 2014).

Critical Evaluation and Analysis

The Business Case and the Environment

The global economy was moving very fast during the period before the recession of 2007. Economic growth was positive and investor confidence was high. Investors were willing to spend their resources in stock markets due to the positive results. Moreover, other fields of investment were doing well, including gold investment, among others. Investor confidence was high during this period and the market was expanding in a positive way. The banks were able to lend, as there was an equal demand for financial services. It was also possible for employers to hire extra labour and increase performance. The period from 2003 to 2007 saw many people being employed, and this was a sign of a growth in the economy (Bivens, Fieldhouse, Shierholz, 2013). The GDP was growing perfectly in the United States, and this was a reflection of the general financial health of the world economy. Most of the European countries had the same economic situation as that in the United States just before the global recession.

The government of the United States of America is responsible for the formation of financial policies that enhance the development of the country’s economy. This means that the political and legal environment in the American market is under the control of the government. In terms of financial laws, the Federal Reserve System is responsible for the formation of policies (White, 2009, p.116). Such policies usually target specific objectives that the lawmakers see as right. The Federal Reserve System’s policies were meant to enhance the ability of consumers to afford credit and acquire property, especially in the housing system. People were able to afford houses and borrow heavily from banks during the period that led to the economic meltdown. The government was working to reduce its interest rates as much as possible every fiscal year since 2001. Citizens were able to borrow from banks and afford houses, leading to an increase in investments in the real estate sector.

An increase in the demand for housing and the ability of people to afford housing led to negative effects on the financial lending institution. The banks found themselves offering a lot of money to consumers at low interest rates. It was almost impossible for the lending institutions to acquire profit from the lending services. In fact, the property owner ended up with a property whose value was as profitable or more than the borrowed money (White, 2009, p.115). It became difficult for the banks to sustain themselves in the market, and most of them were on the verge of a closure safe for government intervention. The situation with the banks affected many parts of the US economy. For instance, borrowing became tougher than before and investors were in a state of shock. Most of them feared to indulge in certain fields of investment due to the dread of making losses.

The economic meltdown affected the securities sector. Investors were taking their money out of the stock market and putting it in other places. The stock rates were dwindling at an alarming rate, and people were acting according to this. Banks, as major investing enterprises, were no longer able to trade in the stock markets and were constantly fighting for survival. There were rising cases of foreclosures and retrenchments, leading to an economic problem in the country. The government had taken the responsibility of enhancing investor goods instead of consumer goods. The economy was no longer able to generate its own income without the assistance of the government. This was a similar case in some European countries such as Spain and the United Kingdom, among others. Professionals term this situation as the credit bubble, where so much money provided to the consumers enhances a risk of business closure for the lender.

The investment market is usually concerned with luxury services and goods in various descriptions. For instance, investment in hotels is a way of meeting the market demand for luxury. However, market demand for luxury depends on the economy of a country, which determines the purchasing power. In the end; therefore, the banks determine the magnitude of investment in the hotel sector and other luxury investment areas. On the other hand, it is also difficult to construct a hotel without adequate finances. This implies that during the economic recession, investors were not able to build hotels. Moreover, even if they wanted to build hotels, it would be for no good due to the market situation at the time. The global recession led to a set of restrained actions by some investors in the market due to the fear of becoming illiquid. Most of them were speculative and did not take part in active investment while others dared to venture into new investment arenas.

The reduction of credit rates in order to enhance borrowing is a perfect way of improving an economy, at first. However, with time, it becomes unsustainable for the lenders to continue doing business in the same way. This situation occurred in the United States of America that led to an economic recession that the government had not expected. The reduction of credit rates started in 2001, six years earlier. The economy was growing at an impressive pace from 2003 and houses were becoming affordable with the government’s help. Other sectors of investment were doing fine and the economy was perfect. No one was expecting an abrupt collapse as the one experienced during the global recession period.

The results of the global recession were mixed up. Investors were moving up and down trying to save their money from going down with the recession. People were looking for perfect places to invest in a safe way. There were investors who did not fear making losses and continued doing business while others had to act swiftly in response to the recession. This depended on factors such as the fields of investment, among other influential things. This study gives focus to the reactions of investors during the global recession period.

Findings and Analysis

The findings of this study were those compiled from the data gathered from the secondary research. Initially, the researcher sought out random research data on various investors who operated under various fields.

The purpose of the first question in the mind of the researcher while seeking out secondary data was to determine the categories under which the research’s variable fell. The results from various data were tabulated as shown in Table 1 below:

  Main field of investment?
Securities 21
Real Estate 45
Jewellery 16
Other 12

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