Capital Market: No prospects for short term rebound

OKEY ONYENWEAKU|      It is as if almost everybody knew that the Nigeria’s capital market was going to close in the negative. That was the consensus not only on Broadstreet, but also in corporate quarters. Unfortunately too, the market dynamics did not prove otherwise.

Recent trends reveal that nothing was likely going to turn around the negative drift of the market otherwise. Therefore many investors and market stakeholders conditioned their minds to accept their fate at the end of last year because nobody expected any surprises other than the persisting negative trend.
Thus the market remained deeply in the red by -17 per cent as the All share Index which started the year at 33,943.29 basis points on January 5, 2015 had plunged by December 31 to 28,642.25 basis points.
The market capitalisation also fell from N11.24 trillion during the review period to N9.85 trillion, a loss of over N2 trillion.
Not even the banking sector which is not only the dominant sector but also the most actively traded could buck the weak trend.
This development generated serious concern from investors who seem to be looking for clarity amidst the steamy uncertainty that prevailed in the market.
Particularly worrisome was the fact that the market had developed a niggling volatility that reversed the hopes that prevailed in the first and second quarter of the year following the election of a government in April.
A bevy of stocks have also been reeling from their unprecedented heights to lower levels.
Whereas, many investors are optimistic that the downward bound market would reverse the losses that have been recorded, subtle fears are now palpable that this may be any encore of the experience of 2009.
Investors’ hope of recouping their investments has therefore continued to dim even as the mood on Broad and Marina streets has changed to that of despondency.
Of the 20 respondents who spoke to Business Hallmark on Customs Street, 18 expressed deep regrets that “there is nothing in the market for us again”.
Nowadays, most of the Stock traders look dazed after each trading day.
BH recalls that in the corresponding period of 2008, the market maintained a bullish disposition and investors smiled to the banks.
The major indicators attained unprecedented heights.
The market capitalization peaked at about 13.1trillion and the All Share Index gained a giddy height of 66,551.84 basis points on March 5, 2008. Most of the equities grew bullish and the Nigerian Capital Market was thrown into frenzy.
The market became the toast of the Nigerian Business community, with traders, civil servants, farmers and even students making equity investments.
Many analysts noted that the Nigerian Stock Exchange (NSE) became a beehive of activities with both investors and speculators scrambling to make a kill. Some individual stocks recorded over 100% appreciation while others edged up by 50% and above.
But the story has since changed. The market continued in the red disposition and is plunging further by the day.
What does the economy offer?
Unfortunately the government has not made clear its economic plans for the country.
Whereas there are snippets of information about an expansionary economic focus for 2016 given the budget, there are still fears about the funding and implementation. Whether this would bring the nation out of the present quagmire, many industry observers have expressed doubts given the current shrinking revenues.
A bleak future awaits the market for obvious reasons. There will be massive decline in the value of the Naira which now trades officially at N197 a dollar and N257.00 at the parallel market.
The value of the naira, according to analysts, is expected to fall initially by 10 per cent by first half of the new year and 23 per cent at the end of 2016.
Interest rates are also expected to rise and this will continue to keep the value of stocks down and low.
Foreign investors may not be as willing to invest much in Nigeria given the weakness of the Naira which will reduce the value of their expected dividends and capital gains as most of them are reportedly divesting while others are waiting on the edge.
Unfortunately, J P Morgan Chase has yanked Nigeria off its Government Bond Index, GBI-Emerging Market, EM, over the rise in cost of borrowing and limited access to foreign exchange, which analysts say is capable of impacting negatively on the economy of the country.
The JPMorgan Government Bond Index-Emerging Markets, GBI-EM, indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments.
This also announced the deep risk in investing in Nigeria to the foreign investors as many of them may be considering moving their investments to the United States of America (Federal Reserve) which has raised its interest rate.
The US Federal Reserve raised interest rates by 0.25 percentage points – its first increase since 2006, which tentatively poses investment challenge for Nigeria as it increase U.S. yields.

Government’s revenue has shrunk badly given the sharp fall in the price of crude which plunged from $114 per barrel on June last year to hover between $32 and $34 currently. The government plans an expansionary budget of N6trillion this year with expected deficit of about N2.2 trillion.
This is besides borrowing hugely to fund the budget. Many industry experts have opined that the reduction of MPR and Cash Reserve Ratio to 11 per cent and 20 per cent are not enough to nudge the economy to the rights level.
It is also on record that the tight regulatory policies of the fiscal and monetary authorities such as the Treasury Single Account, stopping COT charges by banks which started this January 2016 and restriction of access to forex on importation of 41 items among others are capable of causing hiccups in performance of companies and shrink their profit margins.
These many believe would hardly encourage economic growth as well as affect negatively the progress of the capital market.
Will the market rebound?
It is difficult to predict with accuracy the capital market, however analysts can make projections based on macro and micro economic environment of any country.
Dr. Afolabi Olowokere of Financial Derivatives Company Ltd believes that human beings will always be optimistic. However, he noted that investors are already not expecting to earn much from the capital market given that market was closed the year in the negative.
He explained that Nigeria should not expect huge foreign inflows this year as investors seem to be waiting on the edge until policies become clearer with exchange rates and budget among other macro-economic challenges.
”I don’t expect any significant improvement in the short term, that is in the First quarter of next year. We are only expecting the budget which can’t do much on its own because even if we fix power and roads, these are long term projects, and will not respond in the short term”, he said.
Also Mr. David Adonri, Managing Director, Highcap Securities Limited, reckons that the situation in the macro-economy now was reflecting in the capital market given that market reacts much early before signs and symptoms start manifesting in the economy. Demand, he said is very low in equities because investors are foreseeing a gloomy future.
He also noted that prospects of the market can only be positively affected if the macro-economy improves. He noted that the Nigerian economy, a mono-product one, which depends on oil, has sharply declined in price, resulting in lack of funds and lack of liquidity.
According to him, investors are looking for two conditions which are discontinuation of oil subsidy and the devaluation of the domestic currency.
” Investors believe if these things are not done the macro-economic environment may not favour meaningful investment in the market”, said Adonri
A Lagos based analyst, Dr. Richard Mayungbe said he does not foresee any magic that can turn the market around in the short-term. But he expressed hope that the New Year may offer something good for investors given the reflationary budget stance of the government.

”N6trillion can recreate and energize the economy. This will definitely trickle into the market”, he said.
President Association of Stockbroker Houses of Nigeria, (ASHON), Mr. Emeka Madubike, said in a telephone interview that there was no strength left in the market to perform any magic  in the short-term.
”There is nothing in the horizon to show that anything can happen again in the short-term. The market is tied to the economy and with the prognosis, nobody should expect any significant progress in the market until second quarter of this year when some policy implementation would have come”, Madubike said.
Foreign investors
Occasioned by dwindling returns in the Nigeria’s capital market, portfolio investors pulled over N410.49bn from the stock market between January and August 2015. Foreign investment outflow exceeded inflow in the first eight months of 2015 last year.
Foreign investors had pulled N846.53bn from the stock market in 2014 although they invested N692.39bn, a development that caused the NSE All-Share Index to close with a negative return of -22 per cent, which continues to put pressure of the exchange rate.This is because the market is dominated by the foreign investors. They accounted for 57 per cent of total transactions in 2014.
In the first eight months of 2015, foreign investment inflow was N367.10bn, which was N43.39bn less than outflow.