Nige­rian Stock Mar­ket and the Eco­nomic Re­cov­ery

Financial Nigeria Magazine - - The Fixes From The Man­ag­ing Ed­i­tor - +234 802 343 9098 jide@fi­nan­cial­nige­ Twit­ter: @JSAk­in­tunde

The main in­dex of the Nige­rian Stock Ex­change, the All Share In­dex (ASI), gained 26.5 per­cent from the be­gin­ning of the year to July 21. With the key macroe­co­nomic data, in­clud­ing real GDP growth, in­fla­tion, un­em­ploy­ment and ex­change rates, still much un­pleas­ant, the NSE ASI's leap is good news in­deed. The eq­uity mar­ket per­for­mance not only tells the econ­omy is on track to re­al­is­ing the tepid growth pro­jec­tions for 2017; it also sug­gests eco­nomic per­for­mance could firm up over the medium term.

Stock mar­ket crashes of­ten her­ald eco­nomic melt­downs. A stock mar­ket would teeter to­wards a crash, if in­vestors sus­tain an in­cli­na­tion to sell, and not buy, the listed eq­ui­ties. This usu­ally oc­curs be­cause of panic re­ac­tion to an un­der­lin­ing eco­nomic prob­lem. And, as we saw with the elec­tion cy­cle of 2015, po­lit­i­cal risk can neg­a­tively re­in­force eco­nomic fac­tors that might have al­ready set a stock mar­ket into trending de­cline.

Ac­cord­ingly, the NSE ASI started a pre­cip­i­tous de­cline when the prices of crude oil be­gan to nose­dive in July 2014. From over $110 per bar­rel, the Brent Crude, which is the grade of Nige­rian Bonny Light sweet crude, fell sharply below $60 in Jan­uary, 2015 and below $40 a year later. This re­sulted in for­eign ex­change illiq­uid­ity of cri­sis pro­por­tion, be­cause oil ex­port ac­counts for 90 per­cent of govern­ment's ex­ter­nal earn­ings. The wider econ­omy is largely im­port-de­pen­dent, for in­dus­trial in­puts and con­sump­tion. Ex­cept for re­mit­tances from Nige­ri­ans in di­as­pora, other sources of sig­nif­i­cant forex in­flows, such as For­eign Di­rect In­vest­ment and For­eign Port­fo­lio In­vest­ment, are cor­re­lated to the oil rev­enue peaks and troughs.

There­fore, at the end of trad­ing in Jan­uary, 2015, the ASI had de­clined by 31.2 per­cent from its peak value of 43,030.27 points on July 16, 2014. This un­der­scores the im­por­tance of oil in the econ­omy, although oil con­sti­tutes 15 per­cent of the GDP.

As oil prices re­mained de­pressed in the in­ter­na­tional mar­ket, the im­politic de­ci­sion for mil­i­tary re­sponse to the Niger Delta cri­sis by then-new ad­min­is­tra­tion of Pres­i­dent Muham­madu Buhari added in­sult to in­jury. In a counter-re­sponse, the Niger Delta mil­i­tants em­barked on large-scale at­tack on oil in­stal­la­tion, lead­ing to the loss of one mil­lion bar­rels of ex­port per day. This made it im­pos­si­ble for the ASI to be re­silient to the low oil prices, and the econ­omy en­tered tech­ni­cal re­ces­sion at the end of Q2, 2016.

But stock markets also pro­vide the first sign of re­cov­ery from eco­nomic melt­downs. Stock markets of­ten beat the gun in a race with the real econ­omy. Be­cause the um­pires don't mind this, a mis­lead­ing im­pres­sion of per­for­mance could be cre­ated. So, what should we make of the im­pres­sive growth of the ASI so far this year? The mar­ket data pro­vides some in­sights.

First, Nige­rian banks have proved their re­silience amid the eco­nomic woes. For that, they re­main the dar­lings of in­vestors. The Bank­ing sub in­dex of the NSE grew by 57.8 per­cent from the be­gin­ning of the year to July 21. The in­dex held 11 per­cent­age points lead over the Pen­sion in­dex, which placed sec­ond. The col­lec­tive per­for­mance of the bank­ing stocks is re­mark­able, given the mul­ti­ple macroe­co­nomic risks to bank­ing as­sets and the dam­age their forex li­a­bil­i­ties caused their bal­ance sheets when the naira de­pre­ci­ated sharply in the of­fi­cial mar­ket in 2016.

Sec­ond, the penny stocks – in­clud­ing the bank­ing gi­ants: First Bank, United Bank for Africa and Ac­cess Bank – led the bank­ing rally. At the sum­mit of the best-per­form­ing bank stocks were UBA, which grew by 102.6 per­cent; FBN Hold­ings, 79.1 per­cent; and Ac­cess Bank, 64.3 per­cent. This would sug­gest that in­vestors were guided by his­tor­i­cal highs of the stocks, even if also by the fun­da­men­tals of the com­pa­nies, in a rather cau­tious ap­proach to in­vest­ing.

Third, and this is where the anal­y­sis takes a neg­a­tive tone, the Con­sumer Goods in­dex of the NSE grew by 13 per­cent, lag­ging well be­hind Bank­ing (57.8 per­cent), Pen­sion (46.3 per­cent), and In­dus­trial (33.8 per­cent). This re­flects the grim liv­ing con­di­tions of Nige­ri­ans, whose propen­sity to con­sume has been re­duced by high in­fla­tion, loss of in­come and grow­ing un­em­ploy­ment.

In­di­ca­tors that have a bear­ing on con­sump­tion, in­clud­ing wage and job growth, usu­ally lag in the af­ter­math of a re­ces­sion. There­fore, the pol­i­cy­mak­ers, who have started beat­ing the drums as we draw close to the end of the tech­ni­cal re­ces­sion should re­alise that they are not likely to have the peo­ple danc­ing; not yet. Long af­ter the re­ces­sion of­fi­cially ends, its neg­a­tive im­pact on the wel­fare of Nige­ri­ans and hys­tere­sis ef­fect on pro­duc­tion will con­tinue to linger.

Lastly, Oil & Gas was the worst per­former among the ma­jor sub-in­dexes. It grew by 4.8 per­cent. For the in­vestors, this is quite an un­der­whelm­ing re­turn, well below the av­er­age year-to-date in­fla­tion rate of 17.2 per­cent, and con­sid­er­ing that oil & gas shares are among the most costly stocks.

The Nige­rian oil in­dus­try faces for­mi­da­ble chal­lenges. One, the peace in the oil-rich Niger Delta is of the grave­yard, and it was shattered in the course of writ­ing this ar­ti­cle. Fresh mil­i­tant at­tack saw 150,000 bar­rels of oil per day shut in. Two, a new le­gal and reg­u­la­tory frame­work, which osten­si­bly would spur new in­vest­ments in the oil in­dus­try, has re­mained stuck in a leg­isla­tive co­nun­drum. And, three, the an­tic­i­pated in­vest­ments seem less aus­pi­cious now with the weak price out­look of oil in the in­ter­na­tional mar­ket and grow­ing tran­si­tion to re­new­able en­ergy.

How­ever, it is clear that con­fi­dence has re­turned to the stock mar­ket. Even from the prism of spec­u­la­tion, no one places a bet with­out any pos­si­bil­ity of win­ning. Mar­ket con­fi­dence is not the an­tithe­sis of delu­sion.

The source of in­vestor con­fi­dence in the Nige­rian stock mar­ket, to a lesser ex­tent, is the in­jec­tion of more liq­uid­ity into the forex mar­ket by the CBN. More im­por­tant is the re­cov­ery in oil pro­duc­tion and the sta­bil­ity of oil prices above the 2017 bud­getary bench­mark of $42 per bar­rel. But these are sus­cep­ti­ble to shocks.

It is re­mark­able that, in spite of the growth in 2017, the NSE ASI has re­mained way below its all-time peak val­u­a­tion in 2008. Sev­eral other markets that were fu­eled by bub­bles have sur­passed their pre-2008-2009 cri­sis highs. For the Nige­rian mar­ket to make sim­i­lar re­cov­ery, we need eco­nomic pol­icy in­ge­nu­ity and com­pe­tent po­lit­i­cal lead­er­ship.

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