Published On: Mon, Apr 30th, 2018

2019: Bulls take fright as market rally loses steam


With the stock market looking drowsy from a fast-paced marathon race last year, bulls seem to have gone into a deep sleep as bears continue to prowl. Year to date yields on the Stock Exchange (NSE) are sputtering like badly manufactured candles as stock prices continue to drop. So far, the All Shares Index (ASI) has seen its yield drop from a sizzling 16.8 per cent in January to a relatively modest 7.85 per cent at the close of trading last week.

Market analysts note that the year started quite promisingly with traders addicted to the rush of a 46 per cent market yield in 2017 expected to grow faster in 2018 as gross domestic output (GDP) picks up. GDP has been forecast by the International Monetary Fund (IMF) to grow by 2.2 per cent in the current year. Theses forecast may not result in major stock market growth as worries about the country’s huge fiscal debt hangover (debt service is about two thirds of the 2018 budget) and oversized budget deficit (estimated at over N2 trillion)still keep investors on edge.

The market has fallen into a sustained rut in recent weeks as investor bearishness has dominated the occasional bull charge by some more optimistic traders.  Says Awele Atuje of Capstone Investments, ‘’if the market is going to whip up lively returns anytime soon, the signs seem to be hiding behind dark clouds ‘’, according to Capstone’s head of corporate finance, ‘’anxiety over political direction (or misdirection), dodgy economics and a growing skepticism about the Presidents capacity to deliver on his three cardinal programmes of security, economy and jobs, throws a wet blanket over all earlier predictions’’.

Indeed for the first quarter of the year, the stock market’s year-to-date return has been disappointing. But the disappointment did not kick in until late in the quarter. By contrast in January and February enthusiasm was running wild as the market was kept on a permanent upswing with yields fluctuating between a sizzling 11 per cent and a scorching 16 per cent, making the ASI one of the four highest yield markets on the planet. However, analyst note that by the end of March passions had cooled as traders pulled back cash from the market leading to a downward spiral of stock prices as the All Shares slowly collapsed right up till the last week of April. ‘’The market has taken a few  knocks in the last few weeks leaving a gaggle of investors with bloody noses; first quarter (Q1) results making the headlines have been surprisingly decent’’, notes Chris Anyegbunam, head research and marketing, Quantum Investments and Trust.

According to Anyegbunam, ‘’global financial markets have reflected the generally dark mood of investors against the backdrop of rising global nationalism and petty trade scuffles between countries especially, China and America. Besides, in the case of Nigeria, investors are not too fond of the administrations creeping statist policies.’’ Free marketers are becoming increasingly wary of the administrations tendency to barge into areas usually reserved for private sector activity. According to Anyegbunam, ‘ Government has a wonderful area of importance which is usually called public administration, its intrusion into matters best suited to the private sector is like getting a tailor to do a carpenters job, the consequences can be dire’’ she insists.

The equity market captured by the ASI’s falling numbers has had a steep and slippery slide since March when investors got spooked by nasty noise emanating from government over issues of the 2018 budget and the country’s huge annual debt service obligations in excess of 60 per cent of the budget. Lively investors have since smartly decided to vote with their feet until the dust settles.

Even though true that yields on government fixed income securities such as treasury bills (T-bills) and bonds have started falling in the country they are still hooked at double digits making them clever places for investors to park idle cash, especially with domestic inflation rate dropping to 13.3 per cent at the end of Q1, a far cry from the 17.24 per cent at the end of Q1 of the previous year, 2017.

With yields on treasuries becoming sticky at a two year low, investors should normally be trooping into the stock market to take a peek at possible increases in investment returns, but so far this is not happening.  The trouble is that investors are suffering from pre-election malaise. The upcoming outcome of the 2019 elections is keeping both voters and investors on edge as the current administrations patchy performance in managing the economy puts pressure on local and foreign confidence. The government has done a sparkling job of containing inflation which is about 400 basis points above the upper limits of its target range of between 7 and 9 per cent, but this has come at the massive cost of jobs and economic growth.

The government’s budget deficit has created a few scary scenarios of a debt bubble that could blow up in everybody’s face as it struggles to service the ballooning obligations. The government presently spends about 34 per cent of its revenue on debt service. Analysts are of the conviction that as a proportion of gross domestic product (GDP), Nigeria’s debt of N22 trillion or 21.3 per cent of national output appears reasonable enough but the uncertainty that surrounds the price of the country’s major export product, crude oil, makes for concerned retrospection. ‘’Debt can be a useful thing if channeled to self-financing and self-sustaining projects but when buried in recurrent expenditure the situation becomes tricky’’, notes Dr Biodun Adedipe, an economist, former banker and public and private sector consultant.  Adedipe, speaking on the sidelines of a Financial Correspondents Association of Nigeria (FICAN) lecture last year, insisted that, ‘the fiscal authorities must temper borrowing appetite with a huge dose f circumspection, borrowing must be done in a manner consistent with conservative revenue expectations, the more uncertain the international oil market becomes the better it is to err on the side of caution’, he noted.

Chasing Adedipe’s observation Professor Leo Ukpong of the Faculty of Business Administration, University of Uyo, Akwa Ibom State, equally observes that, ‘’you can’t make omelets without breaking eggs, if you take the debt beer in large enough quantity you must be prepared for the painful hangover. Fiscal economics should trump its politics, fiscal spending on showpiece projects should be scaled back, the size of government should be allowed to shrink and the priorities of government should be reflected in fiscal allocations. For example, you cannot reasonably talk about creating employment without having a functional and well-funded educational system’’.   

The fiscal arithmetic of a yet-to-be -passed 2018 budget will very well affect the way the stock market plays out in 2018. If the government allows the expenditure taps to run freely, the gush of cash in the system would stimulate economic growth but halt the decline in inflation. In the short term rising growth and equally rising inflation would pull up the equities market and push returns higher than its sub 7 per cent over the last four weeks. Nevertheless, whether this would be harmful or beneficial in the medium to long term would depend on whether the fresh money is put in capital or recurrent spending. Recurrent spending would merely enlarge the fiscal deficit and fatten the stomachs of politicians and public servants, but capital spending lead to higher domestic productivity, increase employment and raise tax revenues which would go to financing repayment of borrowed funds.

So far the government has been ambivalent and embarked on fiscal transfer payments that are a show of populism and social liberalism rather than constructive spending on projects that refinance themselves through taxes, tolls and levies. Will the bearish stock market persist for the rest of the year? Reading tea leaves is a precarious business, but if the fiscal authorities start spending money in critical capital projects by mid-year, the All Shares should be able to rise above a year-to-date yield of 12 per cent by the end of the third quarter and perhaps rise to about 20 per cent by year end, but it is unlikely that investors will end up with a final yield anywhere near 40 per cent mirroring last year’s stellar performance. But who’s to say? Forecasters like other human beings are fallible and miracles still happen or do they? Hopefully they do or so we would like to think

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