…As investors lose N160bn in four days
By Peter Egwuatu
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.
Forces behind market depression 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.
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.”
