Nigeria’s stock market has roared to one of the fastest growing capital exchanges in the world over the last half a year rising by a thundering 37 per cent year-to-date (YTD). On a year-on-year basis the market has soared by a staggering 2,961.49 per cent. Why has the market rocketed forward while the economy has stalled at a growth of less than one per cent? Analysts have had different explanations but what has become evident is that fresh funds have followed the Central Bank of Nigeria’s (CBN’s) introduction of a flexible foreign exchange buying and selling window for investors called NAFEX, the Nigerian Autonomous Foreign Exchange market.
With a flexible exchange rate window, foreign portfolio investors have slowly returned to the market and started buying up equities. Already market capitalization which measures the value of securities sold on the floor of the stock exchange has attained a high of N12.836trillion YTD. The Nigerian Stock Exchange (NSE) All Shares Index (ASI) closed at a high of 36,864.71 points as at last Friday, July 28, 2017.
Equally, market sector indices have also yielded to bullish pressures by edging up a notch as traders make sustained bid calls for preferred stocks in each market category. This is demonstrated by the relatively modest 16.03 per cent YTD growth recorded by the markets Consumer Goods Index (CGI). The Banking Index (BI) also went up year-to-date by a sizzling 70%, while the Oil& Gas sector Index climbed 9%. Even the traditionally sluggish Insurance sector gained a cheery 8.4% YTD. Similarly, the Lotus II and the Industrial Goods Index have edged up by 19.3% and 44.7% respectively.
The markets upsurge has encouraged a season of optimism amongst market stakeholders such as shareholders, directors, corporate managers and even the tax authority.
Market analysts have fingered a growing sense of economic recovery as a dominant cause for the stock market’s bullish run. With inflation rate cooling and the CBN’s monetary policy committee decision to leave rates unchanged at 14% with cash reserve ratio at 30% and liquidity ratio at 22.5% earlier spooked investors appear to be more comfortable with the ongoing predicatability of monetary policy.
”The market is cooling down. However, what has galvanised bullishness has been signs of economic recovery and stable monetary policy,” says Managing Director, HighCap Securities Limited, Mr. David Adonri.
Some analysts, however, believe that a further reason for market momentum has been the observation that institutional and high net worth investors have been divesting from money market securities and ploughing their money into the equities market for higher returns.
”There is expectation that interim dividend will come with the impressive half year earnings of a number of companies. Investors are interested in those returns”, says Managing Director, Crane Securities Limited, Mike Ezeh.
On the surface, it would appear that the market which has recorded a two year high has fully recovered and stabilised. But a few market watchers and sundry investors believe that the market is still characterised by uncertainty and that the bull charge will end very soon. They have adduced a number of reasons and done some scenario analysis to arrive at their conclusions.
Political uncertainty has been identified as a state that has made it difficult for the economy to stabilize. President Mohammadu Buhari has been absent for over two and a half months on health grounds and the Vice President , Professor Yemi Osinbajo (SAN), is doing his best, but cannot really be as assertive as Nigerians would desire given his troubles with a narrow tribe of senior government officials close to President Buhari.
There is mounting tension amongst the ethnic groups given secessionist activities of the Indigenous People of Biafra (IPOB), the quit notice of October 1, 2017 to Igbo’s in the North by the Arewa Youths Consultative Forum (AYCF), the unrest in the Niger Delta, and the persistent nefarious activities of the Islamic Sect, Boko Haram. Crime has reached its highest point in recent times as Kidnappers are now targeting soft targets like school children. The volatility all these have caused is scaring investors both local and foreign.
From an economic perspective, Nigeria’s economic recovery is still about 70 per cent dependent on the uncertain price of crude oil. This implies that Nigeria’s expected revenue still depends on what happens to the volatility of crude in the short and long term. Nevertheless, the economy is picking up with the oil production, an impressive agricultural sector and promise to carry out strong public capital spending. However, the foreign exchange distortion has not yet been fully resolved, the private sector credit is still very low, the Economic Recovery and Growth Plan is still a plan that nobody is certain will be implemented. Experts forecast the economy will grow 0.24% or 1.3 %.
Whereas it is believed that the budget of N7.3trillion which has been passed would help to liquify and lubricate the wheel of economy, Experts have also expressed concern over the N2.51tn fiscal deficit of the Federal Government in the first half of this year, adding that it was stifling the growth of the private sector.
This notwithstanding, Governor Central Bank of Nigeria CBN, last week warned that the economy might relapse into protracted recession if bold monetary and fiscal policies were not activated immediately to sustain the programmes of the Federal Government.
Emefiele stated, “Available forecasts of key macroeconomic indicators point to a fragile economic recovery in the second quarter of the year. The committee cautioned that this recovery could relapse into a more protracted recession if strong and bold monetary and fiscal policies are not activated immediately to sustain it.
“Thus, the expected fiscal stimulus and non-oil federal receipts, as well as improvements in economy-wide non-oil exports, especially agriculture, manufacturing, services and light industries, all expected to drive the growth impetus for the rest of the year, must be pursued relentlessly.”
He added, “The committee expects that timely implementation of the 2017 budget, improved management of foreign exchange, as well as security gains across the country, especially in the Niger Delta and north-eastern axis, should be firmly anchored to enhance confidence and sustainability of economic recovery.
The Monetary Policy Committee last week in a meeting also identified the downside risks to this outlook to include weak financial intermediation, poorly targeted fiscal stimulus and absence of structural programme implementation.
The Minister of States for Petroleum Resources, Emmanuel Ibe Kachikwu said with discomfort that Nigeria was unable to produce to its full capacity of 2.2million barrels as benchmarked at N42.50 in the budget and instead produced about 1.7 million barrels per day.
This, according to many is a threat to the funding of Nigeria’s budget which already has a deficit of about N2.5 trillion.
Dr. Boniface Chizea believes that foreign investors are coming into the country but added that they are still cautious.
”They are investing and money is coming in but they are certainly not in a gold rush. That is why the exchange rate has stabilized. In fact, returns are still high for hot money. But if you are talking about establishing a factory here; that is another matter completely”, said Dr. Boniface Chizea.
Some shareholders argue that regulatory lapses have been part of the reasons local participation has not been very high. They cited some alleged fraudulent activities as the one concerning stockbroking firm, Partnership Securities Limited (PSL) and its sister companies – Partnership Investment Company Plc; Life Care Partners Limited; and SBDC Microfinance Bank Limited, which were embroiled in alleged N10 billion scandal based on official estimates relating to diversion and misappropriation of funds. Others fingered the market crash of 2008 in which many lost over 70 percent of their when the Allshare index plunged from the giddy height of 66,000,00 to below 25,000.00. They argued that what caused the huge losses was inadequate regulation at that time.
Former Managing Director of one of the big banks in Nigeria, Mr. Emma Nwosu argues though Nigeria was at a critical juncture, there still good and solid investment opportunities here and there. He explained that the country cannot easily tip over as people feel and fear.
”However, a foreign investor may not agree to invest in Nigeria presently given that the country risk is high and the prospects of stability slim”, he said.