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Published On: Sun, Jul 15th, 2018

Bearish market force investors to retreat


Investors have had a turbulent time with the  stock market this year; right from the end of the first quarter of the year when the market’s main board went into a tailspin, investors knew they were in for a season of shrivelling returns.

The Nigerian Stock Exchange

Year-on-year the All Shares Index (ASI) has bundled over from a thumping yield of 42 per cent at the end of 2017 to last weeks minus 2 per cent. ”It has been like a pebble  skipping along a shallow pool”, notes Oluwarinu Olawale, head of operations  at Capital Express Securities Limited,” the ripples exaggerate the initial impact” she says.  Apparently, bears (investors with dark market outlooks) have dragged the equities market into a nasty cubhole from which few expect to make a short term comeback. Indeed, a growing number of market analysts are beginning to ask the question whether the market is as bad as everybody thinks? The answer, apparently, appears to be ‘No’.

Even though the All Shares Index (a measure of market growth) has tanked by a nasty – 2.22  per cent year-to-date  (YTD) ( a far cry from January’s tearaway year-to-date yield of 16 per cent),  the ASI, nevertheless, exaggerates the state of the economy.  While GDP has grown by a sleepy 1.95 per cent (one of the slowest in the last decade), it has, nevertheless, progressed far faster than the negative rates between 2016 and the first quarter of 2017. Different agencies have predicted alternative year end figures but there does seem to be a consensus that the economy will rise between 2.2 and 2.6 per cent in 2018. ”Forecasting is not an exact science”, notes Segun  Atere, Chief Research officer at Apel Assets and Trust group, ”but growth expectations within a narrow band between 2.4 and 2.6 per cent looks plausible. We expect inflation rate to fall just below 10 per cent per annum by the year end and maybe further to within the Central Bank’s range of between 6 and 9 per cent.”, Atere insists that with inflation below ten per cent, the likelihood of President Muhammadu Buhari, ”retaining his office as President  becomes significantly greater”. However, the CBN itself is sceptical about meeting a single digit goal within the course of the year as hawks on the monetray policy committee of the bank feel that politically-induced fiscal spending could temporarily stall the slide in the growth of the aggregate price level.

According to the research models of domestic analysts,  a ten per cent inflation rate could be a ‘tipping point’ that influences voters decision in 2019 besides other factors such as unemployment rate and national output (GDP) growth rate. So far Nigeria’s Central Bank has been decisive in keeping inflation rate in check. Indeed, domestic Inflation rate has slumped from a towering 19 per cent in January 2017 to a significantly lower 11.61 per cent in May. A combination of tight money supply, especially narrow money or M1, and a high policy rate (MPR has stayed stuck at 14 per cent over the last two years) has put brakes on money growth and led to a spell of disinflation over the last 32 months.

To be sure, lower inflation , according to analysts, has seen nominal interest rates hang at high real rates that continue to puncture holes in the pockets of borrowers while improving the purses of lenders. According to industrialist and economist Suraj Akinyemi, chief executive officer of animal feed manufacturer, Surak713, ”money supply cut backs have done wonders for inflation  but they have also had a wiltering effect on industrial growth while worsening unemployment”. According to Akinyemi, ”a fruit diet is a great health boost but without a steady regimen of protein, you could be looking for a solution that is worse than the ailment”.

Equity returns have either gone flat or skidded into lower digits as stock prices have taken a knock. The fall in the prices of large cap stocks has essentially been driven by foreign portfolio investors spooked by worsening domestic security and  lingering doubts about the peaceful nature of the forthcoming 2019 elections. The fear has rolled into a sustained offer (in other words, sell) position by traders who have been instructed by foreign equity funds to continue to off load stocks without strong countervailing bid (buy) positions by bulls wanting to take up the perceived growing hidden value opportunities.

Nevertheless, running into the second half of the year with equities looking better as bond yields slowly melt , investors may need to revisit the stock market. Treasury Bill (T-bill) yields which at one point in 2017 were as high as 17 per cent per annum have since cooled to a less inspired 12 per cent or a drop of 500 basis points. This has seen investors scamper for alternative places to park idle cash.   For a couple of investors the foreign exchange (FX) market has been the market of choice, as international oil prices remain well above the 2018 budget benchmark of USD$52 per barrel, Brent has hovered between USD$ 50 per barrel and USD$ 77 per barrel for most of the year and West Texas Intermediate (WTI) has bumped along between a narrower band of USD $64 per barrel and USD $74 per barrel. This has given the Nigerian fiscal and monetary authorities enough headroom to keep the Naira to Dollar exchange rate within a stable corridor of an official rate of USD$/N305 and a Bureau d’ change rate of USD$/N358. Nevertheless, shorting (selling) the naira and buying dollars is still a sensible investment tactic as robust political spending in the run up to the elections next year will likely see the naira go soft against the American greenback. 

This could prove critical for investors with stocks in the Petroleum production (upstream) sector of the local bourse. Equity prices of these stocks may rise powerfully as the corporations in the sector reduce their once-upon-a-time deliquent credit exposure to local banks. This should imply that corporate debt equity ratios in the sector would begin to look healthier going forward and operating results could improve notieceably, suggesting better future bottom lines. ”Some of these companies are going for a steal, and buying them up now looks like a lovely way of locking in superior future returns”, insists Apel’s Atere who believes that the oil sector rebound would be a boon for both listed companies and their investors.

Meanwhile, fixed income investors are not going to see the racy yields they enjoyed in 2017 this year. With the fiscal authorities recalibarting the public debt micture betwen local and foreign loans, the local debt market is likely to experience flatter yields as the government takes its borrowings to the euromarket. Lower local borrowings will see thinner coupons and higher bond prices as supply of domestic instruments get choaked off and government becomes less active in the domestic market as budget gaps get funded by less expensive foreign  debt instruments. Yields may, needless to say, remain double digit for some time and with inflation scaling down, treasuries may still be a good place to park idle cash on risk free terms.

As politics heats up and stock and money markets cool against the backdrop of fear, anxiety and domestic insecurity, the capital market may not provide immediate returns of worth, but for investors with an outlook beyond twelve months, if 2019 elections in Nigeria averts ending in a fiasco, the possibilities of great hidden value in capital markets will leave a few patient punters with broad smiles and heavy cash in months ahead.

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