2016: Difficult year for Nigeria’s capital market

nigerian_stock_exchange

The 2016 investment year will remain indelible in the minds of investors on the Nigerian Stock Exchange, NSE, just like the 2008 global financial meltdown.

This stems from the fact that the nation’s stock market in the review period experienced a major setback which eroded investors’ confidence with over N1trillion drop in market capitalisation.

Consequently, 2016, according to analysts, turned out to be a year of wailing and lamentations not only in the capital market but in every sector of the economy occasioned by the prevalent economic recession.

The nation’s Gross Domestic Product (GDP) recorded a negative growth of -2.1 per cent, with the Naira exchanging for N304 per dollar at the official market in the latter part of the year at the Foreign Exchange Market.

As it was the case in 2015, investors returned to another locust era with many of them seeking for a haven in the fixed income securities, while some patronised Ponzi schemes in their desire for higher returns.

However, most stakeholders attributed the prolonged lull in the equities market and economy in general to tight macroeconomic policies, falling crude oil prices which thwarted stakeholders expectations and led to the exit of foreign investors.

Available statistics showed that in spite of the orchestrated market recovery championed by the capital market regulators, the Nigerian bourse will close for the year as one of the worst performing markets across the globe, due largely to sell pressure by panicky foreign and local investors.

At the last count, monthly foreign inflows outpaced outflows as foreign inflows decreased by 23.51 per cent from N24.41 billion in September to N18.67 billion in October 2016.

Also, foreign outflows as of October 2016 amounted to N12.57 billion as against N19.18 billion in September, representing a decrease of 34.46 per cent.

The total transactions at the nation’s bourse decreased significantly by 32.44 per cent from N94.77 billion recorded in September 2016 to N64.03 billion (about 0.21 billion dollars) in October 2016.

Similarly, total transactions from January to October 2016 decreased significantly by 40.55 per cent from N1.67 trillion recorded within the same period in 2015 to N991.11 billion in 2016.

The nation’s market scenario, according to analysts, pointed to the need for increased participation of domestic investors, especially institutional investors as well as introduction of new tradable products to deepen the market.

Records of trading on the Nigerian Stock Exchange (NSE) as of December 23, 2016 showed that the equity market dipped by over seven per cent year-to-date due to massive sell-off due to waned investors’ confidence.

Specifically, the All-Share Index which opened trading for the year at 28,642.25 shed 2,156.23 or 7.53 per cent to close trading on Dec. 23, 2016 at 26,486.02.

Also, the market capitalisation lost N737 billion or 7.48 per cent to close trading in the same period under review at N9.113 trillion against N9.850 trillion posted on Dec. 31, 2015.

However, an analysis of the price movement table from January to November showed that Forte Oil emerged the worst performing stock in percentage terms having dropped by 83.72 per cent to close at N52.71 against N330 it opened for the year.

Skye Bank followed with a loss of 68.35 per cent to close at 50k against the year opening price of N1.58, while Caverton dipped 61.94 per cent to close at 94k compared with N2.47 it opened for the year.

Conversely, Dangote Flour topped the gainers’ table between January and November in percentage terms, appreciating by 214.16 per cent to close at N3.55 per share against the year’s opening price of N1.13.

It was trailed by UBA Capital having appreciated by 87.02 per cent to close at N2.45 against N1.31 and Total grew by 76.11 per cent to close at N258.90 compared with N147.01 it opened for the year.

Other factors that affected market growth in spite of enhanced regulatory framework embarked upon by regulators were hike in inflation, increase in Cash Reserve Requirement by the Central Bank of Nigeria as well as increase in Monetary Policy Rate.

The market was also negatively impacted by the instability in the Naira exchange rate against other international currencies, crash in global oil price, Niger Delta unrest, delay in the presentation and passage of the 2016 budget as well as insecurity issues.

Glenn Prince-Abbi, Executive Consultant and the Chief Executive Officer, Espera Global Corporation, said that optimistic paradigms for 2016 built by players and analysts were dashed due largely to diminishing foreign reserves occasioned by dwindling oil revenue.

Mr. Prince-Abbi says that at the opening of 2016 in less than two weeks into the year, the market registered a woeful loss of N1.7 trillion within just ten trading days.

According to him, manifestations of stormy weather remained essentially prevalent in varying degrees through a good part of this year, serially wiping out wealth across varied asset classes.

However, events in the last couple of weeks showed substantial improvements to make one anticipate brighter prospects in the market.

“Generally, these are bad times for most emerging and developing economies. From South America to Asia, to the Middle East and Africa, the experiences are similar.

“The state of the capital market is often an index to the general macroeconomic situation.

“The capital markets in commodity-dependent economies such as Nigeria remain turbulent or at best unhealthy.”

Mr. Prince-Abbi notes that there can never be “a robust and high-performance capital market if the fundamental brickwork that is at the base of the economy is wobbling.”

He says that an innovative macroeconomic policymaking with strong strategic insight remained paramount to providing the platform and delivery system to trigger general improvements across the wide spectrum of economic activities.

He urges capital market operators and investors to look more at the medium and long term investment windows rather than being caught by the syndrome of short-term speculative actions.

Uche Uwaleke, Head of Banking and Finance Department, Nasarawa State University, Keffi, says that the reason for the dismal performance is not far-fetched because stock market performance all over the world is tied to global and domestic economic fortunes.

Mr. Uwaleke notes that in the case of Nigeria, the weakening macroeconomic fundamentals were largely to blame.

He explains that the dwindling oil price and oil output disruptions resulted in three consecutive quarters of negative economic growth.

“The performance of the Nigerian stock market since the year began as measured by the percentage change in the NSE All Share index is in the red.

“The year to date return (YTD) between Jan. 1, 2016 and November 30 is in the region of -5 per cent.

“Market capitalisation which stood at N9.6 trillion at the beginning of the year dropped below N9 trillion by end of November.

“Similarly, the NSE All Share Index fell from about 28,000 points to about 25,500 points during the same period. When you factor in inflation rate which rose from 9.6 per cent in January to 18.3 per cent in October, it shows a significant negative real return for the stock market.’’

Mr. Uwaleke adds that high unemployment and weak aggregate demand caused by inability of many state governments to pay workers salaries affected the bottom lines of many quoted companies.

He explains that the delay in the implementation of the 2016 budget contributed to the development, noting that the general lull in the market does not give room for any appreciable level of primary market activity as IPOs and public offerings were scarce.

“The banking sector took the heat from tight CBN monetary policy and the previous year effect of the sudden implementation of the Treasury Single Account (TSA) which compounded the challenge of non-performing loans,’’ he adds.

The exit of foreign investors equally had a negative impact on the stock market though this might have contributed to the reduced volatility in high priced stocks such as Nestle Plc.

Overall, the poor stock market performance is a reflection of the effect of oil price shock, Forex challenges as well as uncertainties in global economy occasioned in part by Brexit which kept many foreign investors on the sidelines.

But, the South Africa’s JSE All Share Index has performed relatively well posting a one year gain of 5.12 per cent with the index range from 45,975.78 to 54,704.22.

This is not surprising since South Africa’s economy is a lot more diversified than that of Nigeria and depends less on commodity prices.

Going into 2017, market performance will be determined by Donald Trump’s economic policies in the U.S. as well as how quickly the legal issues surrounding Brexit are resolved.

On the domestic scene, they will be shaped by policies and measures put in place to exit the recession.

For the market to rebound, the CBN should consider easing monetary policy by reducing MPR as high interest rates have only increased yields on government securities and sharpened investors’ appetite for them to the detriment of equity investments.

The planned borrowings by the government should be invested in infrastructure and employment generating sectors.

Equally, to improve liquidity, local contractors should be paid and the implementation of the 2017 should commence in good time while the government should consider fiscal incentives to encourage new listings on the stock exchange.

All these will complement the current effort of the regulatory authorities at restoring investor confidence.

(NANFEATURES)


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