The Bears maul Broad street as stocks bleed

The Nigerian Stock Exchange

By OKEY ONYENWEAKU
Almost everybody knew that the Nigeria’s capital market was going to close in the negative. That was the consensus feeling not only on Broad Street, but also in corporate quarters.
Unfortunately, too the market dynamics did not prove otherwise.
Recent trend revealed that nothing was likely going to turn around the negative drift of the market to achieve otherwise. Therefore, many investors and market stakeholders conditioned their minds to accept their fate at the end of last year because nobody expected any surprises from the negative trend.
This year, the market has also remained in the red by about -5 per cent as the All share Index which started the year at 31,430.50 basis points on January 2, 2018 has plunged to 29,830.70 as at January 11, 2019. The market capitalisation followed similar trend and dropped heavily.
The negative trend seems to be taking a cue from the discomforting ending of 2018. 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 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 the 2019 on a positive note, gaining 1.27 per cent on the first trading day, that has since been eroded, dipping by about 5 percent 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 amidst the steamy uncertainty that prevailed in the market.
Particularly worrisome was that the market had developed a niggling volatility that reversed the hopes that prevailed in the first and second quarter 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.
However, this view has elicited serious debate between market observers. The view that the coming elections are basically stalling the market growth has been faulted by others who believe that the economic challenge is more of lack of fundamentals.
Analysts at Meristem Securities Limited have blamed 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 rate 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.
”Sentiments to invest in equities this year will be low”, a financial analyst who pleaded anonymity told BusinessHallmark.
Whereas industry observers have hinged their optimism in the fact that market would try to gain traction after the election fever would have dissipated, the views from Broad and Marina streets of Lagos are on the contrary.
”The right triggers to galvanize economic growth is still far-fetched”, a former senior banker said.
Economic experts have revealed that the macro-economic environment may not be favourably disposed to growth in the economy that could, in turn, fuel increase in the prices of equities in the short term.
What the economy offers
The Nigerian economy remains weak, growing by 1.8 per cent in the third quarter 2018. Even though, the growth projections the end of year 2018 are yet to be released, the average growth projections for 2019 stands at 2.2 and 1.9 per cent for IMF and Financial Derivatives Company limited. This, according to experts, is still far below the population growth of about three percent and above and portends danger for the country.
Sadly, the target to achieve a single digit inflation has been elusive as many industry observers opine that inflation which stood at 11.2 per cent in the third quarter 2018 does not only remain a threat to investments in Nigeria, but has every tendency to spike in the new year.
With poor management, implementation and performance rate of the budget and failure to achieve the $1bn targeted from tax evaders and avoiders through Voluntary Assets and Income Declaration scheme (VAIDS), government faces the challenge of inability to meet its revenue to provide the much-needed infrastructure to drive development.
Market observers fear that the price of crude, which is the main revenue earner of the country, may not be favourable to the nation with the budget bench mark of $60 per barrel. Analysts also agree that the price of crude will determine the stability of the country’s foreign reserves and that of the Naira. But uncertainty still lurks around the horizon.
”An uptick in Nigeria’s inflation at a time when the U.S. inflation is declining and the US Fed is more committed to interest rate hike tilts the interest rate differential in favour of the U.S. This increases the probability of naira depreciation.
Following the international Fisher effect equation (which states that an exchange rate is expected to change equally in the opposite direction of the interest rate differential) the naira needs to be devalued by at least 10% to keep investors’ indifferent. The MPC could also consider a tighter monetary policy stance,” said Bismarck Rewane, CEO, FDC
Despite all, the CBN Governor, Mr. Godwin Emefiele, has always expressed concern that the economy can relapse into recession if the fiscal authority does not remain focused and determined to activate and grow it.
A report from the National Bureau of statistic (NBS) told an alarming story of the drop of FDI in the third quarter 2018. According to NBS the total value of capital importation into Nigeria reduced quarter-on-quarter by 47.2 percent in the third quarter of the year. It also noted that the value of foreign investment fell to $2.9 billion from $5.5 billion in the second quarter, representing a 31.1 percent decrease compared to the value in the third quarter of 2017.
What has also weakened the equities market is not far from the activities of foreign investors who pulled a total of N94.43 billion from the equity market in the third quarter (Q3).
According to the Nigerian Stock Exchange (NSE) the withdrawn amount was 23.59 per cent lower than the N123.59 billion pulled out of the market in the second quarter of the year.
Given the economic report card of the nation, analysts seem convinced that with the expected huge borrowing by the government, debt securities and money market securities will attract investors and draw them away from equities, an indication that equity market may not receive adequate attention this year.
Will rebound the market?
It is difficult to predict with accuracy the capital market, however analysts can make projections based on macro and micro economic environment of 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 explained that the Government will 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 market closed the year in the negative. Olowokere also argued 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. ”People will wait for the elections to get a direction and it also depends on who becomes President”, he said.
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 him will determine how every other sector of the economy is shaped or affected. Of course, strong economy has a way of influencing the market positively and weak economy does otherwise.
A Lagos based financial analyst, Mr. Charles Iyore believes the Nigerian economy lacks what it takes to drive itself.
”The election and the population will be strong determinants of the direction of the economy”, said Dr. Boniface Chizea of BIC Consultancy Services.
”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”, Dr. Tunde Lemo, former deputy Governor, CBN.
The market may pull a surprise but not for many analysts based on economic indicators.
Investors have always wished to enjoy a repeat of the market 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.