Political uncertainties maul equities market

Political risk is behind the the drop in Nigeria’s foreign portfolio investment

By FELIX OLOYEDE

Uncertainty over the outcome of the 2019 presidential election has propelled foreign investors to take to flight from the Nigerian equity market, causing it to spiral -15.74 per cent this year.

Political watchers have expressed worries over the perceived partisanship of country’s security agencies as opposition party members cry foul over the alleged manner in which the President Muhammadu Buhari-led administration has engaged the Economic and Financial Crimes Commission (EFCC), an anticorruption agency, to pursue members of the opposition accused of corrupt enrichment.

Vote-buying, which has characterized governorship elections held in some states this year, has also been a source of concern. The Osun and Ekiti States gubernatorial elections held earlier in the year were marred by vote-buying which pervaded the exercises.

The equity market has been grappling with systemic challenges as the stocks are now subject to macroeconomic factors, particularly the political environment, Johnson Chukwu, Managing Director, Cowry Assets Management Company told Business Hallmark.

“The greatest factor that is impeding market recovery is elevated political risk. Investors’ apathy has been largely due to heightened political tension,” he further explained.

He, however, noted that the market would rebound after the 2019 general elections, adding that the extent of its recovery would depend on the winner of the presidential election, to be held in February.

“The economy has been down and the equity market has been badly hit, and the only reason one can adduce for this is the heightened political risk in the country’’, explained David Adonrin, Managing Director, HighCap Securities Ltd.

Meanwhile, the Nigerian equity market recovered from the previous lost and appreciated 0.63 per cent as the All Share Index and Market Capitalization closed 30,672.79 points and N11.204 trillion respectively on Friday.

Although it is not just the country’s stock market that has been bearing the brunt of the political tension, it is the most hit by foreign investors’ apathy.

Nigeria’s capital importation has declined in two consecutive quarters

Capital importation into Nigeria was almost halved in the third quarter of 2018 as it dipped 48.21 per cent to $2.86 billion, compared to $5.51 billion in the second quarter and dropped 31.12 per cent when juxtaposed withthe third quarter of 2017, the latest data released by the National Bureau of Statistics (NBS) showed. This is the second successive drop this year.

Foreign Direct Investment (FDI) into the country as at September plummeted -351.23 per cent in the last one year, and -103.03 per cent between June and September this year, while foreign investment in the equity market in the third quarter crashed -351.72 per cent year-on-year and 107.51 per cent quarter-on-quarter as investors continued to leave the bourse in droves.

The exchange which enjoyed one of its finest performance last year, posting 42.3 per cent return, was ranked the 6^th worst performed equity market globally in the last six months, having lost -17.32 per cent during this period.

The Shenzhen’s SZ SME is the world’s worst performed equity market, losing -33.62 per cent this year alone and -27.48 per cent in the last six months.

Beside the heightened political tension that has shrouded the country, its stuttering economic performance has dampened investors’ confidence. Nigeria had experienced slower economic growth in the first two quarters of 2018 before upturning in the third quarter.

Nigerian economy expanded in Q3 2018 after shrinking in the two previous quarters

Nigeria’s economy grew 1.81 per cent in the third quarter of 2018, buoyed by the non-oil sector, which expanded at a faster pace. Crude oil price which slumped to one year low of $55.69 per barrel on November 13 due to glut in the market, occasioned by increased U.S. supply, has also not helped matters. It has, however,risen to $60.28 on Friday.

Despite Nigeria’s non-oil sector growing at a fast pace of 2.32 percent in the third quarter, according to the National Bureau of Statistics and oil production rose slightly to 1.94 million barrels per day (mbpd) in the period, from 1.84 mbpd in the previous quarter, yet the sector’s growth contracted 2.91 percent from the previous year when production was at 2.02 mbpd, it still accounted for over 94 per cent of the country’s foreign exchange earnings.

Rising yields in developed markets, especially in the US, made investors to also lost interest in emerging markets. US 10-year treasury rate has climbed from 2.48 per cent at the start of the year to 2.91 per cent in December 13.

The -9 per cent decline in oil prices this year and Nigeria’s capital importation which dipped -31.12 per cent in the third quarter has taken its toll on the local currency. The Naira has lost -1.17 per cent of its value against the dollar at the Nigerian Autonomous Foreign Exchange (NAFEX) window, trading $/N365.23 on Friday, compared to $/N361 it opened on January 2. This is despite the Central Bank’s massive intervention in the forex market during the year.

The country’s external reserves has dipped almost -10 per cent to $42.88 billion on December 13 from $47.51 billion in May, when it hit four year high.