Fears of the adverse consequence of continued fiscal and monetary policy in the coming year if President Muhammed Buhari wins next year’s presidential election has unsettled the stock market. Due to foreign investors bailing out of the market the Nigerian All Shares Index (ASI) has tumbled -7.31 per cent year- to- date and 0.25 per cent year-on-year.
The local bourse has headed downwards for the better part of the year despite ending the previous year as one the best performing global markets. It posted a 42.3 per cent return at the end of 2017 but -13.01 per cent in the last six months. The market lost -1.17per cent to close last week’s trading at 32,766.37.
Although rising yields in developed markets have adversely affected emerging markets, such as Nigeria, uncertainty about the forthcoming 2019 elections has worsened the market’s performance.
Problems plaguing the market are a combination of emerging markets crisis and political risk, says Johnson Chukwu, Managing Director, Cowry Asset Management Ltd.
“The severity of our problem, particularly the bleeding we have witnessed in the stock market is caused by home grown factors, especially the political risk,” he noted. He added that many portfolio investors have exited the country because of this uncertainty.
To be sure, portfolio investors have trooped to other more mature markets such as the US, which have been seeing higher yields in recent months, after the Federal Reserve Bank hiked interest rate twice during the year, the last month when it increased funds target range by a quarter point to 2 per cent-2.25 per cent.
Ayodele Akinwunmi, Head, research FSDH Merchant Bank told Business Hallmark that because of the coming elections, portfolio investors have adopted a “wait and see” attitude. “If the election is successful, and we believe it will be, more money would come in as foreign direct investment and foreign portfolio investment,” he explains.
Even the Monetary Policy Committee of the CBN at the end of its meeting last week expressed expressed concern over the decline in major capital market indices. It attributed the decline largely to sustained profit-taking by portfolio investors and capital reversals as foreign yields become increasingly more attractive.
In every election year about 12 months to the general election, the capital market is always feeling the negative impact of uncertainty attached to the political risk, argued Moses Ojo, Head, Business Development and Research, PanAfrican Capital Holdings Ltd.
“From the beginning of this year the stock market ASI has lost 15.74 per cent up till September 18. The fact that our market is being driven mostly by foreign portfolio investors makes it to be vulnerable to exit of foreign investors from our market. Moreover, because of political risk in Africa constitute a significant factor for foreign portfolio investors.
“In conclusion, the tense political climate has affected the Nigerian equity market and the trends is expected to continue until after the election,” Ojo enunciated.
The political risk was further exacerbated by massive vote buying, which characterized Ekiti governorship election in July and the controversies that have been trailing the just concluded Osun state governorship election. European election observers claimed there were irregularities, interference and harassment during the Osun State governorship, which was concluded last week Thursday.
Foreign outflows also increased by 109.97 per cent from N16.34 billion in July to N34.31 billion in August, whilst foreign inflows increased by 84.87 per cent from N19.83 billion to N36.66 billion over the same period, stated the NSE in its August domestic and foreign portfolio participation in equity trading report.
“There was a significant decrease of 42.79 per cent in total domestic transactions from N109.9 billion in July 2018 to N62.87 billion in August 2018,” the report indicated.
Total transactions at the nation’s bourse reduced by 8.37 per cent from N146.07 billion recorded in July 2018 to N133.84 billion in August 2018. And the cumulative transactions from January to August increased by 22.99 per cent from N1.526 trillion recorded in 2017 to N1.877 trillion in 2018.
But despite the put out of foreign portfolio investors from the Nigerian economy, foreign investors outperformed domestic investors by 6.06 per in August 2018. And total foreign transactions increased by 96.21 per cent from N36.17 billion in July to N70.97 billion in August 2018.
The flight to safety by portfolio investors has been mounting severe pressure on the country’s foreign exchange market, though, the Central Bank has been aggressively defending the local currency.
Foreign reserves have dipped 7.13 per cent in the last three months to N44.38 billion on September 27, 2018.
On Friday, the Naira depreciated 0.07 per cent against the dollar to N363.82 at the Investors’ and Exporter’ Forex Window. It was stable at $/N361 and $/N306.40 at the parallel market and Interbank forex window respectively.
The apex bank has been empowered to continue to defend the Naira by the rise in oil price, which rose to four-year high of over $82 last week as OPEC remains hesitant to ramp up production output.
“The Committee identified rising inflation and pressure on external reserves created by capital flow reversal as the current challenges to growth. It noted that inflationary pressures have started rebuilding and capital flow reversals have intensified as shown by the bearish trend in the equities market even though the exchange rate remains very stable.
“The Committee was concerned that the exit from recession may be under threat as the economy slowed to 1.95 and 1.50 per cent in Q1 and Q2 2018, respectively,” Godwin Emefiele, CBN Governor said while reading the MPC’s communiqué last month.