With average year-to-date decline of more than 5.7 per cent, equivalent to a net capital loss of N477 billion in six weeks, rising inflation rate, high interest rate and uncertain foreign exchange, investors in the stock market are caught between incongruous fiscal and monetary policies. But many analysts are hopeful that the turnaround may be around the corner. Capital Market Editor Taofik Salako reports on the dynamics behind the market forces.
Nigerian equities have, for most part of this year, traded in the negative. By the sixth week, average year-to-date return had built up to -5.7 per cent, implying that an average investor had lost nearly six per cent of his portfolio so far this year. With a full-year net capital loss of N604 billion, a net capital depreciation of N477 billion within six-week trading period, apprehensions about the outlook for the stock market are further heightened.
Nigerian equities had lost N3.98 trillion in the past three years, with most equities crashing to their lows. The stock market has been on a losing streak since 2014. Investors lost N1.75 trillion in 2014 and followed this with another loss of N1.63 trillion in 2015. Against the general expectation that political transition and new government will quicken a rebound, equities closed in 2016 with a net capital loss of N604 billion. Aggregate market value of all quoted equities on the NSE closed in 2016 at N9.247 trillion as against N13.226 trillion recorded at the start of trading in 2014, representing a net capital loss of N3.98 trillion.
The All Share Index (ASI), the common value-based index that tracks prices at the Nigerian Stock Exchange (NSE), closed last year at 26,874.62 points as against its year’s opening index of 28,642.25 points. Aggregate market value of all quoted equities also dropped from 2016’s opening value of N9.851 trillion to close the year at N9.247 trillion. Aggregate market value of all quoted equities on the NSE closed in 2015 at N9.851 trillion as against its opening value of N11.478 trillion for the year, representing a loss of N1.627 trillion. The ASI, which serves as sovereign equities index for Nigeria, indicated a negative full-year average return of -17.36 per cent. The ASI closed in 2015 at 28,642.25 points as against its opening index of 34,657.15 points. The losses in 2015 worsened the downtrend that had in 2014 marked out Nigerian equities among the worst-performing stocks globally with average full-year decline of 16.14 per cent. Aggregate market value of all quoted equities had closed in 2014 at N11.478 trillion as against its opening value of N13.226 trillion for the year, indicating a loss of N1.75 trillion during the year.
Transactions so far this year have continued under the shadows of the previous year. Aggregate market value of all quoted equities opened this week at N8.770 trillion as against N9.247 trillion recorded at the beginning of this year. The ASI also opened down at 25,340.02 points compared with its 2016’s opening index of 26,874.62 points. Most analysts expected the National Bureau of Statistics (NBS), which is scheduled to release the January 2017 inflation rate, to announce an increase in the headline inflation rate from 18.6 per cent to some 18.7 per cent. At its first meeting this year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) had maintained its monetary stance, retaining the Monetary Policy Rate (MPR) at 14 per cent and the regulated “floating” foreign exchange rate to N305/$.
For the Nigerian investors, 2017 appears to be a make or mar year. With the stock market already against its traditional cycle with three consecutive years of losses, running deficit in the fourth year could further weaken the investors’ appetite.
Decisive factors
The market pundits are out with the prognoses of the market in the year. In all, there is almost a consensus that the performance of the stock market will be determined, to a large extent, by effective resolution of Nigeria’s foreign exchange (forex) impasse. “The exchange rate of N305/$ is neither a realistic nor an effective price of the currency at this time. This is because you cannot get dollars at this price unconditionally,” Chief Executive Officer, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, said in reference to one of the major disruptions to the stock market.
“The currency furore formed the central narrative of 2016 and will determine how macro-economic outcomes play out in 2017. Improved liquidity in the forex market – either by moving to a properly managed float system or through larger Federal Government forex receipts – is one key step towards an economic recovery,” Cardinal Stone Partners, a broker-dealer at the stock market, stated in its outlook for the year.
According to analysts at Cardinal Stone Partners, despite attractive valuations, the reversal of fortunes for the equities market in the year will depend on a decisive policy response to the country’s fiscal and currency crisis.
Nigerian Stock Exchange (NSE) Chief Executive Officer, Mr. Oscar Onyema, noted the strong link between the forex situation and the economic performance, including the stock market. The bottoming out of crude oil prices and a drastic decline in domestic oil output curtailed crude oil export proceeds, which accounts for roughly 90 per cent and 70 per cent of Nigeria’s forex earnings and government revenue. This resulted in forex liquidity challenges during the year, as the supply side of forex into the CBN dropped by over 70 per cent, despite heavy domestic demand.
Onyema said it was the oil price shocks and the prolonged forex dilemma coupled with challenges to policy implementation, that drove the economy into its first recession in over 20 years by second quarter of last yaers.
Analysts at Afrinvest Securities said the low foreign exchange liquidity that plagued the economy throughout the year contributed to the decline at the stock market as investors, especially foreign portfolio investors, were wary of being trapped within the forex illiquidity.
Foreign portfolio investors, who see exchange rate risk as a major determinant, traditionally account for nearly half of transactions at the Nigerian stock market. Most analysts shared this view on the forex-meddling influence on share pricing trend. The CBN had in June 2016 introduced a new flexible foreign exchange policy, freeing the Naira from its long-held peg of N197/$. Under the new flexible foreign exchange system, the apex bank merged all existing segments of foreign exchange market into a single “window”, where pricing is determined by market forces with limited intervention from the apex bank. However, foreign investors and several market pundits saw the interventions by the apex bank, often below demand, as incongruous and this saw the onset of the forex illiquidity and exodus of foreign investors. The premium between the interbank and parallel markets widened because of the forex scarcity. The Naira depreciated by 34.73 per cent at the interbank market to N305/$ and by 45.01 per cent N491/$ at parallel markets in 2016, indicating a premium of N186.
The stock market felt the forex impasse more. The benchmark ASI, which peaked at 31,071.25 points in June 2016 with a positive year-to-date return of 8.48 per cent, started to retreat into sustained decline as total foreign portfolio inflow dropped by 45 per cent from N42.46 billion in June 2016 to N23.43 billion in July 2016. A full-year foreign portfolio investment (FPI) report by the NSE showed that total foreign transactions decreased by 49.51 per cent from N1.03 trillion in 2015 to N517.55 billion in 2016. It was the lowest in six years and it was the first time that domestic transactions would outpace foreign transactions since 2011. The drag-on effect also saw domestic transactions decreasing by 28.02 per cent from N880.56 billion in 2015 to N633.82 in 2016. Altogether, total transactions at the stock market declined by 39.58 per cent from N1.91 trillion in 2015 to N1.15 trillion last year.
The market intelligence analysis of a comparative Dollar-Naira data provided by the NSE, which factored forex risk into market transactions, showed that contrary to Naira-based valuation, which confirmed that the Nigerian equities lost N604 billion or 6.17 per cent in 2016, forex-adjusted simple nominal return for equities was -38.6 per cent, equivalent to a net capital loss of N5.83 trillion at current exchange rate. Total loss at the stock market, including equities and other securities, stood at about N10 trillion in 2016. The comparative Dollar-Naira data indicated that total market value of the Nigerian stock market dropped by about 37.8 per cent, equivalent to N9.83 trillion in 2016, when adjustments were made for the steep decline in foreign exchange (forex) during the year, providing the full glimpse of the losses suffered by investors during the year. A nominal Naira-based valuation had indicated that total market value of the stock market dropped by N817 billion or 4.81 per cent last year. Total market capitalisation of the NSE, including equities, bonds and exchange traded funds (ETFs), which opened 2016 at $85.295 billion, dropped to $53.068 billion by the end of the year, indicating a loss of $32.23 billion or N9.83 trillion at the current exchange rate of N305 to a Dollar. Segmental analysis showed that aggregate market value of all quoted equities, which opened last year at $49.56 billion, closed the year at $30.35 billion, representing a loss of $19.11 billion or N5.83 trillion at current exchange rate.
Market value of bonds dropped from the year’s opening value of $35.82 billion to close at $22.71 billion, a decline of 36.6 per cent or $13.1 billion, equivalent to a loss of about N4 trillion. The market value of ETFs also depreciated by 21.95 per cent from the year’s opening value of $20.16 million to $15.73 million, a decline of $4.43 million or N1.35 billion.
A full-year report on capital importation by the National Bureau of Statistics also underlined the tepid interest of foreign investors in Nigerian securities during the period. Capital importation declined by 46.9 per cent $5.12 billion last year as against $9.6 billion in 2015, the lowest value since the NBS started tracking the inflow in 2007. Foreign Portfolio Investment (FPI), which directly relates to the stock market, recorded the highest decline of 69.8 per cent while foreign direct investment (FDI) dropped by 27.8 per cent. FSDH Merchant Bank, which handles a great deal of foreign investments, said the uncertainty around the forex was unnerving investors. “Under a managed float foreign exchange system, it is difficult to forecast the foreign exchange rate,” FSDH Merchant Bank said.
“We expect investors to continue to keep a close eye on the divergence between the interbank forex rate and other exchange rates in the country. Accordingly, a convergence of forex rates in the country and the performance of listed corporates will determine the level of market activity in the short term,” Onyema said.
Many also see the implementation of the this year’s national budget and the expected recovery of the economy, denoted by positive growth in Gross Domestic Products (GDP), as linchpins for the capital market recovery. Most pundits, including the International Monetary Fund (IMF), said they expected Nigeria to quit the recession and return to the growth path by the third quarter of this year. The Federal Government is proposing a budget of N7.3 trillion for the year. The aggregate revenue is estimated at N4.9 trillion, leaving a deficit of N2.4 trillion, which is expected to be financed mainly by local and international borrowings. The government plans to source N1.07 trillion of the net deficit from external borrowings and N1.25 trillion from the domestic market. The increase in budget spending, especially with the increased focus on infrastructural spending, could stimulate the economy and the capital market. Financial experts agreed that the national budget has both direct and indirect impacts on the capital market, and it has been shown historically to influence the performance of the stock market.
While financial experts noted with concerns that deficit financing could exacerbate the crowding out of private sector and increase costs of fund, they agreed that channeling deficit funding to critical infrastructure and a further restructuring of the budget with emphasis on capital projects would stimulate national growth and help to whittle down negative side effects. Head, Economic Research and Policy Management Division, Securities and Exchange Commission (SEC), Dr. Afolabi Olowookere, said the expansionary budget is necessary to return the economy to the path of growth and recovery. Citing historical trends, Olowookere said the increase in government spending this year would have positive impacts on the economy and the capital market. According to him, in financing the budget deficit, the debt segment of the capital market would derive some immediate benefits while the performance of companies that produce and supply goods to government priority sectors will likely improve.
B. Adedipe & Associates Chief Consultant, Dr. Biodun Adedipe noted that the expansionary budget may serve as enabler for the economy because of its focus on infrastructure spending, which should facilitate the growth of the productive base of the economy.
But many analysts also underscored the importance of harmonious fiscal and monetary policies if the objective of the national budget would be achieved. “We believe that an expansionary budget would not necessarily generate the fiscal impulse to boost economic growth if other structural factors inhibiting households and firms from spending are not removed,” Afrinvest Securities stated.
Cowry Asset Management Limited Managing Director, Mr. Johnson Chukwu, called for urgent review of the monetary policy stance of the CBN by reducing the high interest rate, which he described as a major distortion in the government’s quest to drive economic activities.
According to him, the apex bank is unwittingly working for the collapse of the national private lending system with its policy stance that encourages capital flight from banks and lending activities to the safety of high interest-yielding government securities. Chukwu said the apex bank should reduce the cash reserve ratio and monetary policy rate (MPR) to support the growth agenda of the government.
“The key thing is how to channel savings and investments to stimulate domestic productive capacity. People will not have appetite to invest in risky businesses, or equities, when returns on sovereign and other fixed income securities are higher, in double digits. At lower interest rate, we will be able to stimulate the economic capacity by mobilising savings into the productive sector,” Chukwu said.
Adedipe also agreed on the need for the apex bank to abandon its inflation-targeting approach for a lower interest rate, describing the school of thought that saw negative real rate of interest as a major factor as “old school” economic mindset as demonstrated by more pragmatic approaches by policy makers.
“Significant market rebounds in the past were underpinned by serious economic reforms, and we think this would be the case going forward,” Cardinal Stone Partners stated in reference to the need for a broad-based approach that links monetary policies to fiscal objectives.
Most analysts also agreed that the huge undervaluation of Nigerian equities could attract sufficient bargain-hunting to push the market to its first positive close in four years in the year. Group head, financial advisory, GTI Capital Group, Mr. Hassan Kehinde, said the sustained price depreciation in recent years has primed the market for a recovery this year, no matter how modest that will be. Analysts at Cardinal Stone Partners noted that while quoted companies may not deliver hugely impressive results for last year’s business year, there could be more relatively attractive dividend yields because of depressed valuations.
“Most of the quoted companies are trading at huge discounts to their intrinsic values while some are even trading below book value. We believe that the market may rally in the year. If the Federal Government can communicate economic policies that inspire investors’ confidence in sectors of the economy,” FSDH Merchant Bank stated.
Enabling environment
Many stakeholders also believe that landmark developmental initiatives and self-reforms being championed by capital market regulator, most of which are expected to kick-off this year, would positively impact the market. The National Assembly and capital market stakeholders are expected to round off and possibly enact new laws and amendments that will see remarkable changes in corporate laws and market structures. Drafts undergoing scrutiny already suggest major changes, including the reconstitution of the Nigeria’s apex capital market regulator, SEC, under the headship of an executive chairman. New laws and amendments are expected to provide linchpins for full automation of the capital market and corporate reporting, including initiatives, such as electronic public offering, full dematerialisation, electronic dividend payment and electronic receipts.
The capital market may finally do away with the issuance of dividend warrants as payments for dividends. A timeline of June 30, this year has already been fixed for the cessation of dividend warrants. As from the second half of the year, shareholders will only receive their dividends through the electronic dividend (e-dividend) directly into their bank accounts. This is expected to reduce the menace of unclaimed dividends and help shareholders to recover previously unclaimed monies.
Also, the stock market is expected to witness a paradigm shift this year as the market transits to direct cash settlement that links investors’ bank accounts directly to their investment accounts. Under the arrangement, the stock market will transit from the current stockbroker-mediated payment system under which proceeds of shares sales are remitted to the stockbroker for onward remittance to the investor, to a new system under, which payment will be made directly to the investor’s account. The new payment system, known as ‘direct cash settlement’, will become the mandatory payment process for the stock market as against the current stockbroker-mediated payment system. However, any investor may apply for specific or continuing remittance of his net proceeds to his stockbroker.
Many rules coming into effect at the NSE are also expected to redefine market behaviours and corporate disclosures and enforcements. These include the redefinition of the standards for declaration of interim and final dividends, stronger sanction regime for delay and default in submission of corporate earnings and pilot phase of auto-flow of corporate information. The most expectant listing this year is that of MTN Nigeria, Nigeria’s largest telecommunication company. Many analysts have said the listing of the telecommunication company could positively impact on the overall market perception and performance, citing similar influential listings, such as Dangote Cement and Seplat Petroleum Development Company. MTN Nigeria had already appointed advisory team and set out a roadmap towards listing on the NSE in the year. The listing of MTN Nigeria may trigger a wave of listings in the telecoms sector. Airtel Networks Limited, Nigeria’s second largest telecoms company, has said it may consider listing its shares on the NSE as it considers various options to further upscale its business. The listing of MTN and Airtel is expected to enliven the telecoms sector of the NSE.
Cautious optimism
But caution remains the refrain at the capital market. Most analysts are holding on to dual positions – the bull and bear positions. Afrinvest Securities, with its three-point concerns of forex, oil revenue and economic reforms, envisaged a bull position of average return of 15.6 per cent in the equities market in the year or a bearish market with average negative return of between -1.5 per cent and -16.4 per cent. Meristem Securities Limited indicated a possible average full-year return of 3.49 per cent for the equities market. Cardinal Stone Partners stated that the benchmark ASI could deliver an average return of nine per cent.
Nearly all stakeholders- investors, analysts, operators and regulators, are worried and apprehensive over the direction of the pricing trend in 2017. To many, the deciding factors are still out there, and they are beyond the stock market-foreign exchange crisis denoted by distortive multiple and disparate rates and restricted access, high interest rate, soaring inflation, weak disposable incomes and savings and investments, low corporate earnings outlook and generally weak macroeconomic fundamentals among others – all exogenous macro factors beyond the control of the immediate market stakeholders. But many also believe that the long-running price depreciation and developmental initiatives by market stakeholders have primed the Nigerian stock market for a recovery.
For investors, it is still a windy season. But whichever way the wind glides, investors will still need to hold on to the fundamentals and keep keen eyes on emerging issues as they unfold.
