Across the world, stock markets are generally regarded as sensitive barometers which measure the health of an economy. This view finds support in the performance of the Nigerian stock market which often correlates with the state of the economy. In 2016 for example, when the economy was going through a recession, key market indicators remained in the negative territory, reflecting the realities of a weak economy. While equities market capitalisation lost 6.2 per cent dipping from N9.86tn on January 1, 2016 to N9.25tn on December 30, 2016, the Nigerian Stock Exchange All Share Index shed 1,495.7 points over the same period to close year at 26874.62 points from 28370.32 points on January 1, 2016.
The year 2017 was a spectacular one for the Nigerian economy following a return to a positive growth trajectory and the stock market was a huge beneficiary of this development. The market had an impressive showing in 2017 having closed the year with a return of 42 per cent making it the third best performing stock market globally behind Argentina (77 per cent) and Turkey (48 per cent). Much as domestic investors demonstrated enthusiasm, it was the foreign investors who led the charge on the Nigerian bourse. The introduction of the Investors & Exporters window by the Central Bank of Nigeria in April 2017, on the back of oil price recovery and stronger output, ensured liquidity in the foreign exchange market which buoyed portfolio investments.
The economy appears stronger today than it was in 2017. The rebound in crude oil prices and production volumes has led to unprecedented foreign reserves accretion, shy of $50bn. The recovery in crude oil revenue has also enhanced exchange rate stability and helped moderate inflationary pressure. Agriculture in particular has gained traction- thanks to a number of initiatives put in place by the Central Bank of Nigeria.
In spite of these positive developments in the economy, investors’ moods have swung tremendously this year. With each passing day, stock prices seem to be on a trip of their own, out of sync with improvements in the economy. Equities prices have largely been on a downward spiral since February 2018 with market breadth in the negative on the average. The re-enactment of the four-week rally witnessed in January which had Year-to-Date return climbing to as high as 16 per cent appears a pipe dream. The NSE stock market report for May 18, 2018 indicates that the All-Share Index and Market Capitalisation depreciated by 1.34 per cent to close the week at 40,472.45 and N14.660tn respectively with Year-to-Date return dropping to 5.83 per cent while Quarter-to-Date return is in the negative territory at – 2.49 per cent. This bearish run is despite impressive corporate earnings of listed companies which some argue were already anticipated and fully priced into the bullish transactions that preceded the results. So, what is the explanation for this seeming disconnect with the fundamentals of the economy?
To make some sense of this sliding stock market performance, data from the Institute of International Finance comes readily handy, According to its recent disclosure, the rise in bond yields in the United States has triggered a downturn in portfolio flows to frontier and emerging markets resulting in circa $5.6bn exiting emerging market equities and bond markets in the last two weeks of April alone. This appears corroborated by the latest NSE report on Domestic and Foreign portfolio participation in equity trading for April 2018 which disclosed that “total transactions at the nation’s bourse decreased by 22.11 per cent from N272.48bn recorded in March 2018 to N212.23bn in April”. The report added that “total domestic transactions reduced by 36.05 per cent from N140.27bn in March to N89.70bn in April 2018. Foreign transactions also reduced by 7.32 per cent from N132.21bn to N122.53bn within the same period”. It also noted that “there was a 7.79 per cent decrease in foreign inflows from N69.71bn in March 2018 to N64.28bn in April 2018”.
So, beyond price correction, the market is simply sending a message: that all is still not well with the economy. The latest GDP report of the National Bureau of Statistics with respect to the first quarter of 2018 buttresses the fact that the stock market does not lie. According to the report, published on Monday May 21, “Nigeria’s Gross Domestic Product grew by 1.95 per cent (year-on-year) in real terms in the first quarter of 2018. Compared to the preceding quarter, there was a decline of -0.16 per cent points from 2.11 per cent. Quarter on quarter, real GDP growth was -13.40 per cent”. The report further states that “the non-oil sector grew by a mere 0.76 per cent in real terms during the reference quarter, 0.70 per cent point lower than the fourth quarter of 2017. Also, in real terms, the non-oil sector contributed 90.39 per cent to the nation’s GDP, lower than 91.47 per cent recorded in the first quarter of 2017 and 92.65 per cent recorded in the fourth quarter of 2017”.
Little wonder, Fitch, in its recently released Sovereign Rating report on Nigeria, maintained its Long-Term Foreign Currency Issuer Default Rating at B+ which implies that although financial commitments are currently being met, the capacity for continued payment is vulnerable to deterioration in the business and economic environment. As noted by the rating agency, “non-oil revenue remains weak, despite the economic recovery. The government’s attempts at fiscal consolidation have been hampered by low levels of tax coverage and compliance, rigidities in Nigeria’s budgeting framework, and consistent delays in approving budgets”. This sort of commentary does not encourage any investment decision.
It is equally pertinent to note that even though elections are still some months away, the increasing tempo of political activities and the potential to aggravate the current security challenges is scaring away foreign investors. Therefore, to a certain extent, the bear market in recent times has also to do with sentiments soured by political uncertainty. As the market awaits the listing of MTN Nigeria to provide the much-desired trigger, all eyes are on the government to address the challenges in the fiscal space chief of which are the high rate of unemployment and insecurity. The passage of the budget is one thing, its execution is a different kettle of fish. The market understands that which explains in part why it seemed not bothered by the news of the budget passage as the NSEASI dropped by 0.83 per cent on Wednesday, May 16, the very day the National Assembly passed the 2018 appropriation bill. Also, it goes without saying that the security threat posed by rampaging herdsmen in many parts of the country remains a red flag for investors. Therefore, addressing this challenge alongside the faithful implementation of the slew of initiatives contained in the 2018 budget will engender “suitable market conditions” for borrowers and investors alike.
With respect to the performance of the stock market in the first quarter of this year, the takeaway from the NBS Q1 2018 GDP report is that the market is a true reflection of the economy. Indeed, the stock market does not lie.
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