Stock market to face increased volatility

There is a palpable feeling that the equities market will face very difficult times this year 2019 and beyond. And this perceived discomfort has become pervasive on Broad and Marina streets of Lagos since President Buhari emerged winner in the 2019 election which will enable him rule the country for another four years.

In fact, the capital market community’s hopes for a shift in fortunes seems to have been dashed as Atiku Abubakar’s seeming loss in the just concluded election appears to dampen their earlier optimism that brighter days would yet come.

Before the elections, the business community had hoped that a different leader who is more disposed to delivering on policies that will grow the economy, would emerge and ease the persisting tough macro-economic environment that would then give a boost to businesses.

The capital market which has remained bearish even after closing the year 2018 by -17 per cent negative is further rattled by the perception that the Buhari presidency whose economic policies appear antithetic to the growth of equities market will further be agitated given his unfavourable disposition to business in Nigeria since 2015.

After gravitating significantly to the red zone (-17) per cent at the close of business in 2018, the equities market has continued to suffer from the weakness of an economy in which Gross Domestic Product (GDP) grew by a paltry 1.9 per cent last year.

Already the market is still very weak at 0.93% gains Year to date (Friday March 1, 2019) while the major index ASI reveals a year on year -22.57 per cent negative as at March 1, 2019. At the close of business Friday March 1, 2019, the market (ASI) gained 1.26 per cent or-522,48 to close at 31,721.76 basis points.

The negative trend recorded this far in the year seems to be taking a cue from the equally discomforting end of 2018 figures. Industry analysts who are familiar with the market terrain in Nigeria are aware that the market closed the year 2018 in about -17 per cent negative from the 42 per cent gains of 2017.

This contrasts with the giant leap of the equities market in 2017 when ASI closed at 38,243.19 basis points. Its capitalisation also closed on a high at N13.609tn in the same 2017. But the story was different in 2018 as investors in the equities market lost N1.89tn last year amid instability in the market.

Whereas the market started 2019 on a positive note, gaining 1.27 per cent on the first trading day, that has since been eroded, leaving it with a paltry 0.93 percent growth already. 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 despite the seeming calm after President Buhari’s return in the 2019 elections.

Particularly worrisome was the fact that the market had developed a niggling volatility that reversed the seeming hopes that had prevailed in the first and second quarters of last year. A bevy of stocks have also been reeling from their unprecedented heights to lower levels.

Experts believe that the weakness in the market at the end of 2018 emanated from election jitters which compelled foreign portfolio investors to pull out their resources, while others wait on the fringes pending the outcome of the coming elections.

Analysts at Meristem Securities Limited had traced the bearish performance of the equity market in 2018 to negative investor sentiment ahead of the general elections this year in addition to capital flow reversals caused by higher interest rates in the United States which is expected to be 2.50 per cent at the end of this quarter.

“This affected investors’ participation in the stock market and this was worsened by unimpressive earnings performance by companies on the bourse,” said Meristem Securities Limited analysts.

Although no one is able to predict the market with accuracy, many industry analysts do not think the market can rebound in the short term.

While there is a consensus that Nigeria is endowed with great potentials to be a great economy, its’ capital market is rated among the worst performing in 2018.

‘’Sentiment to invest in equities this year will be low”, a financial analyst who pleaded anonymity told Business Hallmark.

The Economy

With a dismal growth of 1.9 per cent in 2018, the Nigerian economy unimpressively lost out on meeting the set target of about 3 per cent. In a mono-economy that is substantially dependent on the vagaries of the price of crude oil for revenues, not much has been put in place to galvanise productivity in other sectors for significant growth.

Sadly, this is even when the country’s population growth rate is put at above 3 per cent annually alongside a corresponding unemployment rate of 23 per cent. These continue then to defy the Economic Recovery and Growth Plan (ERGP) which industry analysts also doubt is not even being implemented even as it betrays no clear vision.

Whereas agriculture, the services and manufacturing sectors inched up in Q4, there are still challenges ahead, said market observers who also noted that even these have hardly eased the continuing threats of the rising unemployment wave among the youths.

Both international and domestic investors have also complained about multiple exchange rates and multiple taxation and even higher taxation on tobacco and alcohol that have bruised firms in that sector among others.

Whereas the government under President Buhari believes it has delivered on its three major promises, namely security, tackling corruption and growing the economy, analysts are quick to point out that there are still mounting incidents of escalating acts of aggression by the Islamist sect, Boko Haram, alongside the menace of the Fulani herdsmen which has barely been tamed. In addition, they observed, the economy still lacks the deserved propulsion to grow evenly while the anti- corruption war is just a surface move.

In all, the Central Bank of Nigeria (CBN) has also noted that the economy recording a 1.9 growth in 2018 signalled that it was still standing on the edge of a cliff which any little indiscretion could easily up turn.

Despite President Buhari’s controversial victory, experts believe that foreign investors cannot easily forget the threat by the President’s strong ally on foreign influencers of the election ‘going back in body bags.’

Others also argued that the President’s failing health has indirectly left the management of the economy in the hands of a faceless ‘cabal’ with perceived self-interest, earning the President the label (from both reputable domestic and international organisations} of being ‘’clueless and incompetent’’.

Again, Nigeria’s rising debt stock which stood at N22trillion is surging back to the unmanageable level that had forced Nigeria to ask for debt forgiveness during former President Obasanjo’s era in office. This is not being helped by the reality that there will be new borrowings of about N3trillion to close the year, which will correspondingly then shift attention to treasury bills and draw investors away from the equities market.

All of these conduced to create huge doubts in the minds of many that for a government that beats its chest over its presumed great achievements even when the country has become the poverty capital of the world, there is almost no hope of its willingness to change its perceived winning strategy and team.

United Capital believes the Buhari administration would engender positive economic fireworks given that it will continue the policies that yielded the small recovery that has been recorded so far. But the United Capital analysts noted that the budget may depend heavily on borrowing, adding that private the sector’s ability to drive the economy may drag due to lack of far reaching and illiberal policies.

HSBC, a reputable international financial institution had before the presidential election said, although the president’s “approval ratings sits near all-time lows,” a development, it noted “largely reflects the impact of Nigeria’s painful recession in 2016-17 and the sustained economic hardship that has accompanied his presidency, including rapidly rising joblessness, and poverty,” the president will once again lead the APC into the 2019 elections.

 “A second term for Mr. Buhari raises the risk of limited economic progress and further fiscal deterioration, prolonging the stagnation of his first term, particularly if there is no move towards completing reform of the exchange rate system or fiscal adjustments that diversify government revenues away from oil.” It also said.

“Joblessness continues to rise, up almost three-fold in three years to 19 per cent in Q3 2017, pushing the number in poverty to 87 million. “Meanwhile, current account improvements may have pivoted on higher oil prices, but they also derive from on-going import restrictions and limited FX access for many sectors of the economy”, it also said.

In a strong voice, Dr. Godwin Owoh, Executive Chairman, Society for Analytical Economics expressed concern over the drift of the economy, saying the economy was still flat.

‘’The economy is flat and down with suppressed fundamentals. The forex regime has been artificial and will trigger inflation soon. I am not sure that even Atiku Abubakar knows how empty the economic fundamentals are, but things will become clearer in the short to medium term,’’ said Dr. Owoh.

However, MD/CEO – BIC Consultancy Services, Dr. Boniface Chizea believes that the uncertainties which have affected investments are no longer there as election fears are now over.

Chizea says the President was expected to build on the momentum and must now adjust some of his policies to run an inclusive government.

He should do something about the killings and be open to anybody who can help with good ideas to turn the economy around.

There is a consensus that the capital market cannot thrive in a weak economy.

Will a rebound happen in the market?

It is difficult to predict with accuracy the Nigerian Capital Market, however analysts can make projections based on the macro and micro economic environment within any country.

A Lagos based financial analyst, David Adonri fears that equities may not be very attractive this year given that investors will do more of money and debt securities. He based this on the fact that the government will necessarily borrow more to fund its budget deficit and crowd out the private sector.

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 the markets closed the year in the negative. Olowokere also argues that the long-term trajectory for the market is not dark given that there would be a better direction for the market after the elections.

He added that it becomes a psychological phenomenon when people take decisions based on developments around them.

Dr. Adi Bongo of Lagos Business School said the price of crude would play a vital role in what shapes the economy in 2019. This, according to him will determine how every other sector of the economy is shaped or affected. Of course, a strong economy has a way of influencing the market positively and a weak economy does otherwise.

A Lagos based financial analyst, Mr. Charles Iyore believes the Nigerian economy lacks what it takes to drive itself. He is not alone.

”I am not impressed with the GDP growth at 1.8 per cent. It is growing far below the population growth at 3 per cent”, says Dr. Tunde Lemo, a former deputy Governor at the CBN.

However, though there is a slim chance yet that the market may yet pull a surprise, but this does not appear to be the sentiment for many analysts based on extant economic indicators.

To be sure, Nigerian investors have always wished to enjoy a repeat of the market era in which market capitalization peaked at about N13.1trillion and the All Share Index gained a giddy height of 66,551.84 basis points on March 5, 2008. BH recalls that in the corresponding period of 2017, the market maintained a bullish disposition and investors smiled to the banks. But that was then and this is now. And even with wishes being horses, do beggars really ride?