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Stock market bleeds on political uncertainties

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Investors’ lose N2.4trn
Outlook may remain bleak till post-election — Analysts

By Nkiruka Nnorom

CONCERNS over the upcoming 2019 general election as well as the cautious stand adopted by Foreign Portfolio Investors, FPIs, and other domestic portfolio managers over the unfolding political events in the country have resulted in a huge loss of N2.35 trillion to equity investors in the last four months.

The bearish trend ended the month of May last Thursday effectively sliding Year-to-Date (YtD) return on investment, RoI, into negative last Thursday, a development that was sustained in the first trading day of June, last weekend.

Trending into June the adverse market situation led to a 6.3 percent Week-on-Week loss last week, the highest loss so far this year. After peaking at N16.154 trillion on January 19, 2018, the market capitalisation of listed equities began a steady decline to close trading on Thursday, May 31 at N13.804 trillion, representing 14.5 percent decline.

Similarly, the key performance indicator of the Nigerian Stock Exchange, NSE, the All Share Index, ASI, which also peaked at 45,092.83 points on the same date, declined continuously to close the month at 38,104.54 points, indicating 18.3 percent decline, and also indicating that it has wiped out all the gains it had made during the early year bullish run.

This was after recording over 18 percent increase in less than three weeks into the year when the market was still enjoying the effect of the 2017 rally that came with positive macro-economic indicators.

Nigerian Stock Exchange

Investment analysts who spoke to Financial Vanguard emphasised that there has been a shift from variable assets to more fixed income assets by both foreign and local portfolio investors, who have been sitting on the fence since February this year. This asset class is considered more secured even though yields in them are narrow.

Uncertainty in the economy

The foreign investors are also said to be moving their funds into Western countries, especially United States of America, on the heels of rates normalisation in the USA market.

According to investment analysts, the panic created by the outcome of the ruling All Progressive Congress, APC, primaries has further heightened the uncertainty in the economy and put investors more on edge.

Consequently, most foreign portfolio investors and the local wholesale investors chose to discount the political liabilities and turned out adverse verdict on the country risk, leading to massive disinvestments.

This position has persisted even at the backdrop of subsequent impressive results announced by quoted companies for both full year 2017 and first quarter 2018, between March and May.

At the end of transaction last Friday, June 1, 2018, the ASI went down further by 3.38 percent thereby bringing the YtD return to -5.4 percent.

Many investment analysts told Financial Vanguard that the market decline may not have bottomed out if the political factors are the key concern, indicating that the outlook for the year 2018 and beyond is bleak.

Foreign portfolio investment down

Financial Vanguard’s analysis showed that foreign portfolio investment, FPI, has been on steady decline with this period. Data obtained from NSE on FPI showed that foreign investors’ participation in the stock market was at its peak in January 2018 bolstering the rally then with N166.39 billion.

However, due to the portfolio alignment and sell-off that followed after the January peak, foreign investors participation dropped by a massive 50 percent to N83.22 billion, but it recovered in March to N132.21 billion apparently on the heels of 2017 full year corporate results announcements. But FPI took another negative downturn to N122.53 billion in April, 2018.

Banking, industrial goods sectors most hit

Further analysis showed that the banking sector and industrial goods sector suffered the most in the ensuing bear run with the banking sector recording 23.4 percent loss. This was followed by the industrial goods sector with 17.8 percent and the consumer goods sector, which fell by 13.7 percent. The insurance sector was down by 12 percent, while the oil and gas sector depreciated by 5.3 percent during the review period.

Top five gainers and losers

Beta Glass Nigeria Plc recorded the highest price gain, rising by 54.4 percent to N87.35 from N56.56 as at January 19, 2018. Cement Company of Northern Nigeria, CCNN, ranked second appreciating by 52.3 percent to close at N26.65 from N17.50. Learn Africa Plc placed third with 48.4 percent increase to close at N1.38 from N0.96. Ikeja Hotels Plc came fourth with 41 percent increase to N2.51 from N1.78 following the lifting of the suspension placed on its shares by the Nigerian Stock Exchange, NSE, in November 2016 over Board room crisis. NEM Insurance Plc emerged the last on the top five gainers’ table, rising by 40 percent to N2.56 from N1.83.

On the other hand, the top five losers comprised of companies that were affected by the NSE’s amended pricing methodology and par value rule, which effectively removed the initial  floor price that had prevented companies that their share prices were trading at par value (50kobo) from falling below the ceiling.

The companies include Unic Diversified Insurance Plc, Multiverse Mining and Exploration Plc, FTN Cocoa Processors Plc, Courteville Business Solution, CBS, Equity Assurance Plc and African Alliance Insurance Company Plc, which all went down by 60 percent to N0.20 from N0.50 on January 19.

Investment experts explain

Looking at the development so far, Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, explained that there has been reluctance on the part of foreign portfolio investors to invest in equities since the beginning of the year.

He stated that the distribution of their (foreign investors) investment in first quarter, Q1, of the year indicated greater concentration in the short end of the market, which was the short-term treasury bills.

Chukwu stated: “For the foreign portfolio investors, they feel that political risk has been fast-tracked. The initial expectation was that political risk will emerge in the last quarter of this year, but interestingly, given the challenges encountered by the leading party in their primaries, that has exacerbated the political risk.

“So, foreign investors are now wary of putting additional resources into the equities market given that at the periods of political or economic uncertainty, investors will move away from variable income assets to fixed income assets.

“In today’s auction (Thursday, May 31), N560 billion was in subscription in Open Market Operation, OMO, auction, which implies that a lot more investors are going into short term fixed income assets.”

Agreeing with Chukwu, Mr. Kayode Tinuoye, Portfolio Manager/Head of Research, United Capital Plc, said: “Compared to  early 2017, foreign portfolio flows into Nigerian equities have been subdued due to rising US interest rate and a stronger dollar. Again, uncertainties around the upcoming 2019 presidential election have also dragged returns. The fact that Q1 Gross Domestic Product (GDP) also disappointed relative to consensus estimates and the late passage of 2018 budget have all contributed to the slowdown.”

Also speaking, Mr. Charles Fakrogha, Chief Relationship Officer/stockbroker with Foresight Securities and Investment, attributed the downturn to the general lull in the macro-economy, the security situation and the uncertainty in the political space. He further stated that foreign investors are also selling off.

Contributing, Mr. Sewa Wusu, Head, Investment Advisory, SCM Capital, said: “Don’t forget, we are entering election cycle and the political development is trying to command attention right now. So, investors may want to be very cautious in order not to make some investment decisions that will be eroded by political events. The fact is that the market is still very strong; the fundamentals of the economy have improved and that is quite impressive as far as I am concerned, but we cannot also rule out the fact that as we enter into the election cycle, a lot of attention will be drifted from economic management and that may slow down the momentum that we are witnessing right now.

“One thing is that if an economy is coming out of recession, there is need to follow up with more spending and more policy to push the economy further so that the momentum do not slow down, but as we speak, momentum may slow down because government’s attention may be diverted from economic management to politics because the race for 2019 has already started.”

Outlook for rest of 2018

On the outlook for the year, Johnson Chukwu of Cowry Asset said that the market would remain lukewarm for the remaining part of the year given the political environment.

“I suspect that the equities market will close negative given the level of political activity we are going to be witnessing in the next few months.

Attention will be shifted from economic management by the executive; they will pay lot more attention to political activities and that will further dampen the enthusiasm of investors to take on variable income assets, which are equities. On balance, one will expect that the market will at best close neutral, but most likely, it will close negative.”

Also, Kayode Tinuoye of United Capital said: “Quite frankly, the Nigerian equities market is unlikely to post a high double-digit return in 2018. However, we think modest returns can still be achieved in 2018.

However,  the major trigger for increased demand for equities is the recent multi-fund structure regulation of Pension Fund Administrators, PFAs, which is expected to increase their equity holding significantly from the current levels. Looking at valuation, the NSE All Share Index is trading at a P/E of 11.4x which represents a 39.8 percent discount to the MSCI World Index and compares favourably with a 5-year average of 13.4x.Therefore, the market remains attractive for the long term.”

Adding his voice, Charles Fakrogha said: “The trend will continue for some time. However, in late June, we might see a reversal as a result of earnings numbers from the listed companies depending on the performance.”

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