Nigerian Stock Market and the Economic Recovery
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.