Total value of stocks listed on the Nigerian Stock Exchange (NSE) fell by N3.255 trillion in twelve months, from September 30 2014 to October 8, 2015. This sharp decline in value of stocks on the exchange, also known as market capitalisation, worsened last week, with investors losing N160 billion between Monday and Thursday.
Specifically, market capitalisation fell by 23.9 per cent from 13.61 trillion on September 30, 2014 to N10.26 trillion at the end of trading on Thursday, October 8, 2015. Another stock market indicator, the All Share Index (ASI) dropped by 26.9 per cent from 41,210.10 basis points to 30123.20 points. Similarly, market capitalisation fell from N10.512 trillion, Friday October 2 to N10.352 trillion at the end of Trading on Thursday, October 8.
Forces behind market depression
This downward trend of the market, according to operators, is fuelled by a number of factors namely, the uncertain political climate before the elections, sharp decline in crude oil prices, devaluation of the naira, expectation of further devaluation of the naira, absence of clear economic direction or policy of the present administration reflected in the late appointment of ministers, exclusion of Nigerian from the J.P Morgan Bond Index and restrictive monetary policy of the Central Bank of Nigeria (CBN).
For example, after the September 8, 2015, announcement by JP Morgan of its decision to phase out Nigeria from its Government Bond Index, Emerging Market, GBI-EM, by ending of October, market indices showed steady recovery from several days of decline from N10.148 trillion to N10.425 trillion in two weeks. The market added N42 billion.
But close to the October deadline for the removal of Nigeria’s bond from the J P Morgan index, the market started to experience decline, with investors losing over N160 billion in four days’ trading .
“If Nigeria is removed from the JP Morgan Index, many foreign investors will be forced to sell off their Nigerian bond holdings, which is estimated to be worth about $2 billion,” noted Mr. Gregory Kronsten , Associate Director Head, Macroeconomic & Fixed Income Research, FBN Capital.
He added: “There are foreign portfolio investors who knew little about investing in Nigeria but decided to invest because it is listed on the JP Morgan’s GBI-EM index.”
The FBN analyst further stated: “Delisting Nigeria would also mean that bond yields and borrowing costs will increase, negatively affecting Nigeria’s dire economy. The Naira may also face another round of major devaluation, as the economy could struggle to sustain the pace of forex outflows outside Nigeria.”
Commenting on the loss experienced in the stock market, various stakeholders who spoke to Financial Vanguard linked the performance to the state of political, economic and financial situations in the country. In its reaction to the announcement by J.P Morgan, WSTC Financial Services Limited, a Lagos-based investment house had said: “We expect both warranted and unwarranted reactions from investors in the equities market.
“We believe the sell-off in equities will be triggered by both panic reaction to the announcement, as well as more fundamental concerns which will be anchored upon elevated required return on equity, attractive returns in the fixed income market and uncertainty regarding the value of the Naira. “We reckon that the rout in the equities market will create attractive entry opportunities for value investors and the ability to take advantage of these will depend on individual investor’s ability to filter the rhythm from the noise.
“However, it is important to state that the fundamental concerns further depress our short term outlook on the performance of the equities market, reinforcing our recommendation for flight for safety through asset re-allocation into fixed income and currency-hedged assets.”
In its own analysis, Afrinvest Group, another Lagos-based investment house, said: “While we observed a knee-jerk reaction in the Nigerian capital market since the announcement, we expect this to stabilize in the medium to long term as we await policy direction from the Buhari’s administration.
“The financial market sentiment feels the impact of this news flow as the domestic investor sentiments will seem to be the new major force driving the fixed income market, while the equities market may still continue to enjoy a mix of foreign and domestic sentiments as Nigerian equities still remains in the Morgan Stanley Capital Index for frontier markets.”
Speaking on the impact of the absence of a cabinet on the investors’ psyche, a financial expert, Mr. Olutola Oni said, “At first, hopes of investors were raised after a peaceful election. But weeks after the inauguration of the President and cabinet not constituted, this had affected investment in the country.
“When the elections were conducted peacefully and the transition was peaceful, people expected that the incoming government would consolidate on that, roll out the list of those that would form the new government and make one or two policy statements. This late appointment has been one of the factors that have affected the performance of stock market..”
He noted that investors are concerned about the economic team Buhari had put up and its ability to handle the twin issues of insecurity and corruption which are key parameters for investment to flourish. “Now that the appointment has been done, the market will now begin to react based on calibre of people that are expected to initiate favourable fiscal and monetary policies,” he noted.
The Acting President of Chartered Institute of Stockbrokers, CIS, Mr. Oluwaseyi Abe said: “Currently, the slow governance, non appointment of ministers, lack of policy direction by the Federal Government have all contributed to affect the performance of the market . It is our hope that once the economy starts running, the market will improve and begin to attract investors.”
In his own comment, Managing Director/CEO of Highcap Securities Limited, Mr. David Adonri said: “The recent decline of the Nigerian stock market is due to several factors. First is the increase of political risks due to infighting within the ruling party at Federal level. Next is the declining price of crude oil. Others are Chinese stock market crisis, resurgence of Boka Haram, protracted energy crisis and macroeconomic liquidity squeeze. When the new government settles down, some of these issues should be addressed.”
The Managing Director/CEO of Capital Bancorp Plc, Mr. Aigboje Higo said: “The economic situation has affected the stock market. The foreign exchange market is a factor that affects the market. The weak naira is affecting investors to invest in the market coupled with rising inflation. Also, the non appointment of ministers is also another factor that has affected the market.
We also have the insurgent situation in the country. Investors are weary of the insecurity in the country and are waiting for the government to assure them of drastic measures aimed at addressing the situation. But it is my hope that all these will soon be addressed given the fact that President Muhammadu Buhuri has started on a clean note by appointing credible people to handle the security sector of the economy.”
Continuing, he said: “The Nigerian capital market has a lot of potentials and investors should take advantage of an array of investment opportunities and do not need to wait until the boom period.”
Market operators however expressed hope that once the President appoints his cabinet, the market will begin to experience increased activity as funds would be made available to various ministries to execute their mandate of running the economy and this would have trickledown effect on the investors who will now have increased purchasing power to invest in the stock market.