NSE: Surging market signals economic revival

TESLIM SHITTA-BEY|

With four months left in the year 2017 investors have begun to count their gains as the Nigerian stock market has soared ahead at a thundering pace. The Nigerian Stock Exchange All Shares Index (ASI), a measure of how well the market has done over the year, has grown by a thundering 31.38 per cent year-to-date and 38.74 per cent on a year-on-year basis. The stunning growth of the market compares strikingly against the lazy 0.8 per cent projected growth in gross domestic product (GDP) in the second quarter of the year 2017. Analysts have had mixed views about the stock market’s recent resurgence but many agree that its fast-paced growth heralds a slow but stronger outlook for the overall economy.
The arithmetic of the stock market’s gains in 2017 is very persuasive. For example, for investors that put up as little as N100, 000 into a banking sector stock such as Guaranty Trust Bank (GT Bank) as recently as August 2016 at the then market price of N25.95, discounting for fees and other charges, the investor would have purchased roughly 3,853 units of the stock; ignoring dividend payments the same investor could have sold the stock last week Thursday at a decent one year profit of N52, 215.80 on a revenue of N152, 215.80.
This is a few kilometers ahead of recent Treasury bill yields of between 16 and 18 per cent and is far ahead of annual domestic inflation rate of 16 per cent. If investment analysts throw in an indicated dividend yield of 5.19 per cent, an investor in GT Bank could easily sip on ginger-laced Chapman with grilled Salmon and vegetable salad somewhere in the Bahamas. The overall indicative investment return is that good. The same is true for other banks listed on the Exchange.
But beyond banks, other companies such as those in the conglomerate and food and beverages sectors seem to be showing signs of strong upticks in their corporate performances, reinforcing the general notion that the economy is gradually beginning to respond to the federal government’s fiscal stimulus. While the International Monetary Fund (IMF) sees the possibility of the economy growing by 0.8 per cent by yearend, KPMG an international auditing and Research Company has a slightly more modest growth projection of 0.7 per cent.  On a note of caution say analyst, the economy has been overshadowed by low growth (0.52 per cent in first quarter), double digit inflation (14.05 per cent), high domestic lending rates (between 22 and 25 per cent annum), and twin digit coupon rates on Treasury-Bills (between 14 and 18 per cent).
If truth be told, in the last one week, market corrections for investor’s excessive exuberance has started to set in. Although the ASI jumped by a lofty 32 per cent year-to-date and 29 per cent year-on-year, the market by the last working day of the week, Thursday, had taken a mild 3 per cent tumble as a number of investors exhausted by the sustained Bull Run of the past eight weeks had decided to cash in their chips and head for the door. Between February and May this year the equity market had pretty much gotten stuck in a rut, as market value dragged along a low trading channel, but by June things had started to look up market with the market going into a frenzy as foreign portfolio investors rushed aggressively onto the trading floor to take advantage of perceived hidden value (or cheap stocks) opportunities.
A number of analysts have expressed worry about the recent highs of the ASI noting that there is modest economic improvement to justify the leap.  ‘We understand investor expectation of an economic rebound but how strong that rebound will be is tenuous.   Sugar tastes sweet but the consequence of the subsequent illness could be devastating; the same goes for unhinged bull markets’ says Olusegun Atere, portfolio strategist at Imperial Investment and Finance, a Lagos based Investment Bank.
Atere points out that the economy in 2017 is not likely to grow higher than 1.8 per cent and therefore, ‘having a bull run of over 30 per cent suggest that either investors have decided to wear rose -coloured glasses or they are a bit busted on stuff better left unmentioned’.  Atere’s sober outlook is shared by former banker and head of chambers, Peter Folourunsho and Co, who believes that, ‘the markets price earnings multiple (p/e) of 14.2 (as against South Africa’s FTSE/JSE of 18.9) is flattering. Investors may be right to expect a market GDP rate above last year’s ugly negatives but growth will still remain relatively slow over the next two quarters, so the market’s recent bullishness is the emotional burst lovers experience just before coital orgasm they soon come down to earth.’
Granted that judging by recently published second quarter results that some stocks appear poorly priced especially banking sector stocks at price earnings multiples (p/e) lower than 5. This is in spite of their recent half year (H1) earnings growth rates which hover between 15 per cent and 20 per cent(suggesting low price earnings ratios adjusted for growth or what market analysts call the PEG ratio), but investors may need to keep a keener eye on major macroeconomic (in other words broad economy) indicators.  Inflation rate has scaled down a few notches over the last five months (which is a sign that the central banks tight control over supply money is working) but this has come at a huge cost of high and rising domestic unemployment rate (estimated at 14 per cent, but could be as high as 26 per cent for those between the ages of 18 and 34 years) and slower manufacturing output. Even the federal government has reduced its earlier brave and optimistic 2018 gross domestic product (GDP) growth projections from 4.8 per cent in its Economic Growth and Recovery Plan (EGRP) launched earlier in the year to a more moderate 3.5 per cent. But even this new figure appears grossly exaggerated.
The best ( and some would say optimistic)growth figure for 2018 would be closer to 2.4 per cent on the assumption that oil prices stay around $50 per barrel and output remains between 1.8 and 2 million barrels per day. The major drag on the economy would basically come from high inflation rate, weak exchange rate and the fiscal authority’s routine sale of Treasury instruments. The use of T-bills to crowd out private sector economic agents is becoming a major problem for the economy as it has slowed the pace of economic recovery and worked against the reduction of domestic unemployment with all its social and economic implications.  The escalating rise in crimes such as ritual murders, kidnapping, and carjacking is symptomatic of an economy with shrinking job opportunities, rising social discontent and limited upward social mobility.
Can this be speedily addressed? Not likely. The trouble is not just with the economy’s current structure but also the government’s broad economic philosophy. The refusal of the Muhammadu Buhari administration to unlock the economy’s underlying potential by freeing the market system to be the chief arbiter of resource allocation and utilization has created a political economy driven by ethnicity, favouritism and public patronage.
Analysts note that the overbearing weight of fiscal influence over economic resource utilization has led to the economy underperforming its potentials by refusing to give freer rein to capital and labour to move into sectors based on profitability, competitive skill advantage and the highest likely return on capital employed. The heavy handed involvement of the fiscal authorities in resources application at both state and federal government levels has encouraged a rush of white elephant projects designed more to impress prospective voters than to create economic value.
The stock markets bullishness in the last two months has been buoyed by foreign investors taking a romantic view of the economy, but as with all issues that involve lust rather than love the emotional high will not last for very long once the initial urge is satisfied. Market analysts agree that a reversal is almost inevitable unless the fiscal and monetary authorities begin to take growth issues more seriously and rather than behave like henpecked lovers, they begin to act like well-trained Olympic gymnasts.