After weeks of a bear run, the equities market slipped to a year-to-date decline last week, creating panic among investors. However, some market analysts were of the view that there should be no need for panic.
For three years, 2014, 2015 and 2016, the Nigerian equities market recorded a cumulative decline of 39.61 per cent. In those three years, some investors remained and endured the bear run. However, in 2017, the market turned the corner and ended with a growth of 42.3 per cent.
It was hoped that the gain recorded in 2017 would be sustained in 2018. But the rate of growth witnessed in the beginning of 2018 was unprecedented as more investors saw the Nigerian market very attractive. By the end of January, the Nigerian Stock Exchange (NSE) All-Share Index had appreciated by 15.9 per cent.
Justification for Early Market Rally
Operators and analysts had attributed the early year market rally to the activities of bargain hunters, who were still swayed by positive developments in 2017 and were taking position ahead of positive results from companies for the year ended December 31, 2017.
Analysts at Meristem Securities Limited, said positive sentiments dominated the Nigerian equities market in 2017 as investor confidence was restored following release of impressive financial scorecards, alongside developments such as the increase of Nigeria's weighting in Morgan Stanley Capital International (MSCI) Frontier Market Indexes and the introduction of the Investors' and Exporters' (I&E) FX window in April which increased the participation of investors in the equities market.
Similarly, analysts at FSDH Merchant Bank said: "The performance of market in 2017 was driven by: the increase in the price of crude oil; introduction of the Investors' and Exporters' (I &E) foreign exchange window leading to stability in the foreign exchange market; improved corporate earnings and the drop in the yields on the Nigerian Treasury Bills (NTBs)."
They had, therefore projected that the factors would remained attractive to investors for most part of 2018 and had therefore expected a sustained bull market.
According to MSL, "Given that we expect the Nigerian economy to maintain its steady growth, we do not expect the market to deviate from its current trend, hence, we opine that this positive momentum will be sustained in 2018, albeit at a slower pace on the back of the high base effect in 2017."
Also, "FSDH said they expected the factors that drove the equity market in 2017 to support the market rally in 2018.
"We observed a strong correlation between the historical movements in the NSE ASI and the crude oil price (Bonny Light). The current consensus is that the average price of crude oil will be marginally higher in 2018 than 2017. The inflation rate should decline further in 2018. FSDH believes the expected drop in the equity market in first quarter (Q1) 2018 is an opportunity for strategic investment in the market ahead of the expected rally in second quarter (Q2). The following sectors should perform well in 2018: Banking; Building Materials; Consumer Goods and Agriculture," FSDH said.
Cordros Capital Limited (CCL) another investment banking firm, was not left out in the express bullish sentiments. According to CCL, the 2018 economic outlook favour the equities market.
Although the firm made a strong case for equities upside potential, it also considered the number of possible risks that could trigger a bear market.
The Head, Research and Strategy, CCL, Christian Orajekwe, said the first scenario assumes that equities will return excess of 40 per cent in 2018.
"We have considered five possible triggers of the rally. The probability of the triggers is low to moderate. The possible triggers, in order of importance to Nigerian equities are: significantly favourable macroeconomic and political backdrop; strong corporate earnings growth; strong portfolio inflows; mergers and acquisition (M&A) activities; and strong moderation of fixed income and treasury yields," he said.
The second scenario assumes about 10 per cent to 15per cent equities return in 2018.
"We have considered four possible triggers of the rally. The probability of the triggers is moderate to high. The possible triggers, in order of importance to Nigerian equities, are: moderate improvement in the macroeconomic environment, as widely envisaged; stable to modest corporate earnings growth; modest improvement in portfolio inflows over 2017; and marginal moderation of fixed income and treasury yields," Orajekwe added.
According to him, the last scenario assumes equities will deliver between 20per cent to 25per cent negative return in 2018. "We have considered four possible triggers of the sell-off. The probability of the triggers is very low to moderate. The possible triggers, in order of importance to Nigerian equities, are: macroeconomic and political shocks; poor corporate earnings; MSCI delists Nigeria from its emerging market index; and foreign portfolio investors flee naira assets," he noted, adding: "Though our projections are not static and as scenarios unfold, we will continue to adjust our projections."
CCL said the downside risks to equities market return in 2018 will be more weighted in the second half (H1). This will be more pronounced in the fourth-quarter (Q4) when it is expected that most investors (particularly contestants during elections) will begin to sell down equities for election spend.
The Market Slows Down
While many investors and stakeholders remained upbeat after the growth in January, the market began to slow down and by the end of February, the gain had contracted to 13.3 per cent. And in first quarter (Q1) it ended with a growth of 8.53 per cent.
While it was envisaged that the release of Q1 corporate results would lift the market in the months that opened the second quarter (Q2), the market maintained a downslide, further reducing the year-to-date (YTD) gain to 7.91 per cent at the end of April. And by the close trading on the last day of May, all the gains recorded in the year by the NSE All-Share Index, which is the benchmark gauge, had been eroded. Consequently, the market's YTD's decline stood at 0.36 per cent as at the end of May.
Market analysts had linked the bearish trend to profit taking by investors in most stocks that had been overbought in the beginning of year. Besides, they said the bear run was fuelled by the exit of emerging and frontier markets.
However, the Nigerian stock market is expected to remain in the bears' territory for sometime as more investors are projected to exit due the uncertainties surrounding the upcoming elections.
"The Nigerian economy responds to politics like many economies and I think anyone who knows how the affairs of the world is run will expect this as some of the people cashing out or taking profit are preparing to fund the election as they need to raise money," Minister of Power, Works and Housing, Mr. Babatunde Fashola said last week.
No Need for Panic Button
The rate at which the market is declining is sending panic to some investors but it is believed that this phase will go away. Also, the slide in prices is seen as another opportunity for more investors to enter the market instead of exiting and therefore, there is no need to press the panic button.
According to the Chairman of Association of Stockbroking Houses of Nigerian (ASHON), Chief Patrick Ezeagu explained that performance of listed companies on Nigerian bourse is good but the current downswing was the effect of general lull in the economy and other exogenous factors prompting both domestic and foreign investors to convert their shares to cash.
Ezeagu explained that nothing was wrong with NSE in terms of governance structure , technology and compliance with the rules and regulations by Stockbrokers.
He said the quoted companies are not doing badly, given the general lull in the economy and the fact that we cannot rule out the usual fear of election, noting that these factors could elicit massive sale of shares, especially by foreign investors.
Ezeagu said: "The federal government should intensify efforts in addressing insecurity problems in Nigeria and keep on reassuring of a safe investment environment. Our market is full of opportunities but we need to sustain the momentum of assuring both indigenous and foreign investors that the market is safe. The exchange is a barometer that gauges the mood of the economy. Therefore, we should address investors' fears in order to enable them take advantage of good returns associated with our market. The current bearish trend is temporary as the market would bounced back soon."
On his part, the President of Chartered Institute of Stockbrokers (CIS), Mr. Dapo Adekoje noted that market fundamentals remained strong and attributed the bearish trend to panic sales by foreign portfolio investors who are taking advantage of emerging higher returns on mutual funds in the United States and Europe.
"Current information about mutual funds in America and Europe that are giving five per cent return on investment (ROI) is attractive to foreign portfolio investors and they are offloading shares to take advantage of the investment opportunity. They are more comfortable with the new returns on mutual funds. The good news is that we are having good valuations. Investors should buy on long-term basis and not short term," Adekoje said.
However, the stockbroker urged the government to initiate policies that would enable the pension fund administrations (PFA ) to increase their investment in the market.
NSE' Strategic Plan to Sustain Growth
The Chief Executive Officer of the NSE, Mr. Oscar Onyema had already assured that having recovered from the three-year decline and recorded a major leap in 2017, strategies were being put in place to sustain the growth going forward.
According to Onyema, in keeping with its object of taking a vigorous and adaptive approach to strategy execution, the NSE re-assessed its strategic agenda in light of changing dynamics in both the operating environment and the global exchange landscape against the backdrop of the fourth industrial revolution.
"This culminated in a new corporate strategy for the 2018 - 2021 period. In redefining its strategic ambitions, the NSE selected three key focus areas to pursue to enhance our global competitiveness and appeal to stakeholders. They are based on: satisfying our customers; boosting our retail segment penetration and enhancing our organisational agility," he said.
In area of enhancing customer focus, he said the NSE was taking a greater focus on "delighting" its customers across the value chain.
He said: "We are committed to better understanding and meeting our customers' diverse needs by leveraging adaptive new technologies, and will be carrying out a series of activities aimed at supporting this objective. Focusing on retail investors, the exchange will increase its focus on growing retail participation as a key component of a well-functioning and resilient market. To this end, we will be partnering market stakeholders to deliver a number of financial literacy and investor outreach initiatives which align with existing plans (such as the Capital Market Master Plan and the National Financial Literacy Plan); as well as undertake new initiatives that can help drive a more radical change. At the crux of our efforts, is the establishment of a Retail Coverage Department, which will be dedicated to the development and publicity of simple, affordable and efficient investment products and services that can effectively support the Nigerian populace - at various stages of financial mobility - to create durable wealth."
He added that the exchange was restructuring to drive its new corporate strategy.
"There are a number of new departments that have emerged to support our evolving strategic ambitions, which are primarily geared towards innovation, emerging technologies and retail participation. We are optimistic that the new structure will support us to better execute on our 2018- 2021 Strategic Plan, enhance organisational dynamics and achieve new efficiencies as we demutualise," Onyema said.