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Capital market: Investors lose N603.7 bn to economic recession

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By Peter Egwuatu & Nkiruka Nnorom

Investors in the nation’s stock market have lost over N603.7 billion of their investments in stocks as the Nigerian Stock Exchange, NSE market capitalisation which represents the value of stocks listed on the exchange dropped by 6.13 per cent per cent Year to Date, YtD.

Capital market operators were also divided over the possibility of market rebound in 2017 and have also expressed that during the period of recession there were sharp decline in share prices of highly  capitalised securities leading to the fall in market capitatalisation and the All Share Index, ASI.

Economic recession is a period of general economic decline for two consecutive quarters and is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in purchasing power.

Recession becomes visible through the decline of all major macro-economic indicators, such as Gross Domestic Products, GDP , slowdown in growth or production, investment spending, household incomes and spending and the unemployment rate rise.

Demand for stocks

Vanguard’s investigations revealed that the performance of the Nigerian stock market had shown that demand for stocks has declined considerably since the recession started.

Specifically, the Nigerian Stock Exchange (NSE) market capitalisation had dropped by N603.682 billion from N9.850 trillion on December 31, 2016 to N9.246 trillion at the close of trading on 30th December, 2016.

Another stock market gauge, the NSE All Share Index, under the period of review declined by 1,767.63 basis points from 28,642.25 points to 26,874.62 points.

Meanwhile, the NSE banking index is the only index out of the five key sector indices that recorded a positive Year-to-Date, YtD, return as at 30th December, 2016. The index recorded +2.74 percent YtD gains while at the end of 2015 it dropped by -23.59 percent.

NSE Consumer Goods: The NSE consumer goods index recorded -4.49 percent YtD loss as at 30th December, 2016. The performance simply mirrors what the Fast Moving Consumer Goods, FMCGs, companies are going through due to the economic recession. At the end of 2015, the index dropped by -17.41 percent. Its current performance represents an extension of previous year’s loss.

NSE Oil & Gas: The NSE oil & gas index recorded -12.31 percent YtD loss as at 30th December, 2016. The index dropped by -6.20 percent at the end of 2015, while its current 2016 performance revealed that higher losses has been recorded compared to the previous year’s performance.

NSE Insurance: The NSE insurance index recorded -11.44 percent YtD loss as at 30th December, 2016. The index dropped by -4.70 percent at the end of 2015, while its 2016 performance shows a further increase in loss.

NSE Industrial Goods: The NSE industrial goods index recorded the highest YtD loss so far in 2016. It dropped by -26.37 percent as at 30th December, 2016. Also, it is the only sectoral index that recorded a positive return at the end of the 2015, going up by +1.27 percent.

Recession impacted negatively on stock market – Operators Capital market operators who spoke to Vanguard, said that the economic recession slowed down business activity in the entire capital market.

However, they said it presented a unique opportunity for them to reposition and streamline their operations through various cost-cutting measures.

Reacting on the stock market performance since the recession started, Mr. David Adonri, CEO, High Cap Securities, said that prices have declined across the entire market.

Opportunities for bargain-hunting

He said: “The listed companies are not performing as badly as prices suggest. Therefore, opportunities for bargain-hunting exist for investors who have money to enter the market now. However, the situation is not conducive for equity issuers to access the market.”

He noted that even before the recession, the market has been down, saying: “the secondary market has been down since 2014, while the primary market has been completely dormant”.

The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, noted that the volume of transaction has gone down in the stock market and prices have relatively remained stable.

He noted that prices are already too low and that the investors that hold the shares are not willing to sell at those prices. “Those that want to buy do not have enough money to buy and that is why we are seeing a downbeat in the volume of transaction,” he said.

In the primary market, we are actually not seeing any activity and in the equity segment, there is no new offer neither rights issue nor public offer. In the bond segment of the market, because of high interest rate applicable at the short end of the market, issuers are not willing to come and borrow money at such a high rate. Again, apart from the pension fund, investors do not have the resources to actually lock in long term instrument. So, you see a major lull in activities of the capital market.”

On what should to be done to drive activities in the market, Chukwu said: “Investors do not have money. The economic outlook is weak, so you find out that the solution to the problem is to address the environmental issues to make the economy attractive.

So, the economy will have to reverse recession to rebound. The security must be gotten back to the economy, local currency security must come back to the economy so that in relation to having access to funding, the outlook will be optimistic. So, stimulations will have to happen at the macro-economic level and then trickle down to the sub-segment of the capital market.”

Mr. Robert Omotunde, senior analyst at Afrinvest Securities Limited, explained that in a recessionary period, the economy is characterized with low activities and disposable income is also quite low. “Not just that, the peculiar thing about Nigeria is that the recession is also plagued with what you can call general rise in price level.


Purchasing power

This invariably affects the purchasing power of an individual. In this period also, a lot of people are out of job and all of these affect the personal income of people who are supposed to invest in the market and you know that you cannot participate in the capital market except you have some savings because investing in the capital market is a form of savings.

“So, what is being experienced currently is the fact that we have stagflation. Stagflation is a period of rising unemployment, high rate of inflation characterized with slow economic activity. The combination of these three won’t support funds that will be directed towards the capital market which is the basic reason why investing in the stock market may be under pressure,” Omotunde said.

Continuing, he noted that the stock market is a barometer for measuring performance of the economy. “So, what you see at the floor of the stock exchange is a reflection of the state of the economy. If the economy is not doing well, the only thing that can revamp the stock market is if the economy does well, what will necessarily need to be done is to see the turnaround in economic activities”, he said.

Also, the Doyen of the capital market, Mr. Rasheed Yusuff stated that recession is affecting every sector of the economy not just the capital market. He said activities in the stock market are low, and there are now reduced persons trading in the capital market which has led to reduction in the volume of business.

On what needed to be done to drive activity in the market, he said: “When there is an economic correction going on, it takes time. Every Nigerian is thinking that there should be a magic formula somewhere but the truth is that it takes time.

The basic thing is for the government policies to be directed towards local production and that will lead to the expansion of the economy and it will manifest in the purchase of capital market instruments.

And so, the whole thing is tied to the same economic problem; if the economy is revived and the companies are doing well, then there will be incentive for people to come back to the market and use their savings to buy shares.

Yusuff explained that, it is important to encourage local companies to thrive so that the economy can have stronger local participation and then have stronger local investors too.

“All of us depend heavily on foreign investors. That is a lesson everybody should learn. We should not leave our economy to foreign investors. We should not leave our investments to foreign investors. We should have very strong local investors directing our economy. So at a time like this, the local investors will be happy, but that is not what we have now and that is what we are suffering from. So we have to re-adjust. We hope that the government will quicken the time of adjustment,” the Doyen said.

Meanwhile, a financial expert, Dr Glenn Prince-Abbi, expressed optimism that the Nigerian capital market and indeed the economy would experience increased activities with innovative macroeconomic policy in 2017.

Strategic insight

Prince-Abbi, who is the CEO, Espera Global Corporation, said that innovative macro-economic policy coupled with strong strategic insight would provide the platform and delivery system to improve economic activities, including the capital market.

He expressed optimism that there would be improvement at the federal government level in 2017 going by the various fiscal policy measures being articulated to stimulate the economy. Prince-Abbi also said that Nigeria’s foreign reserves would likely improve in 2017 with sustained stability in crude oil production output through a progressively diversified export revenue structure.

“Along with this, the real sector performance will improve, productivity growth will register and the GDP growth will rise,” he said.

On how to sustain the capital market, he urged the 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. He explained that short-term speculative actions could harm the market and do nobody any good.

“Smart investment in all climes and times requires strategic thinking; it requires long term views and wider planning horizons.”‘

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