Surviving Uncertain Times in the Nigerian Financial Market

Saturday, January 19, 2019 03:00PM /Proshare Research

Executive Summary

“The stock market can be down, but the stock market is not an indication of where people's spirits and enthusiasm are, and where their intellectual energy is” - James Daly

Uncertainty and gloom has been at the heart of the global economy in 2018 and with sabres rattling and fists pounding it is likely to shape the outcome of world markets in 2019. A number of hot button issues have made the world a much less predictable place. Among these issues that are likely to shape how people live, make money and find hope in the future and present are:

• How Sino-American trade relations get resolved in the year 2019 as the Chinese and Americans adopt a beggar-thy-neighbour countervailing tariff policy to punish each other. The settling of this trade dispute will be a major determinant of world economic growth in the year as revised projections have toned down expected growth rate from an earlier 3.8% to a more modest 3.5%.

• How Europe, Britain and Spain resolve their different areas of conflict could prove critical to European Union (EU) stability. A hard-ball British exit (Brexit) from the Union could throw Europe into a mild turmoil with markets pricing-in higher risk premiums, while a lack of agreement between Spain and it sister European countries over the country’s debt and fiscal deficit management could throw sand into the wheels of the regions stuttering growth rate.

• Falling global commodity prices since 2018 have increasingly put pressure on economies that depend on primary exports for survival. Oil exporting countries, both within and outside the Organization of Petroleum Exporting Countries (OPEC), for example, have seen their fiscal positions weaken as oil prices tumbled.  As things shape up in 2019, growth may be a tough prospect for commodity-dependent economies. The upside is this provides commodity exporters the opportunity to take diversification and industrial processing of raw material more seriously.
  

•  Rising nationalism has meant that labour movement across countries and continents will be less free, the consequence of which would be that governments will be under severe pressure to create meaningful jobs in their local economies. The consequence of poor leadership and lack of capacity to create new jobs will be civil strife and political instability, as labour finds it increasingly difficult to walk across borders with previous ease. 
  

The impact of these global events on the domestic capital market has already begun to manifest. The shrinking of the global economy has seen a slowing of private domestic spending which has translated to lower sales growth and weaker profits. The consequence being that the prices of stocks listed on the domestic Stock Exchanges have declined as investors take a sober attitude towards company earnings and dividend payouts for 2018. This explains why the Nigerian All Shares Index (ASI) declined by 18.7% in 2018 and started the New Year 2019 with an early loss of 2.50% in the first week.

A melt down not a rout

True, the Nigerian Capital Market went through a difficult period in 2018 as major selloffs, especially by foreign portfolio investors, led to a significant fall in the market capitalization of the market and a major loss in portfolio values for both individuals and institutional investors leading the market to drop to just under a fifth of its value at the beginning of the year, a far cry from the 42% seen at the end of 2017. This proved that the Nigerian market was not immune to developments in the global economic community as global stock markets equally saw major declines in values.

As a regular refrain in respect of market attitude and culture; Nigerian analysts, fund managers, financial regulators and quoted companies must learn a new method of market engagement. The local stock market is increasingly sensitive to international market developments by way of foreign portfolio managers increasingly coming in and going out of the market based on a myriad of strategic portfolio considerations. This has increased the volatility of the local market and made it imperative for local participants and actors to become more sophisticated in their investment and corporate decisions. How well the participants respond to domestic and international economic and political information, the more efficient the local market will get and the better the investment opportunities and outcomes for stakeholders. Indeed, the economy as a whole will be a significant beneficiary of a capital market that subscribes to the best practices of global investment. 

A view of markets from the hilltop

To demonstrate clearly how the global and local markets interface, we have devoted Section 1 of this report to reviewing the global economy and markets, African economy and markets and Nigerian economy and markets. The report takes a panoramic view of the global, continental and Nigerian financial markets with a view to giving readers insights into factors responsible for emerging developments.

To fully appreciate the submissions in Section 1 we undertook an assessment of trading statistics in Section 2 of the report, deploying a research based approach in the review and 2019 projections for financial markets in particular and the economy in general. Here, we undertook extensive analysis of equity market performance, taking snap shots of secondary market movements and performers.

Section 3 of the report deals with stocks that were enlisted and delisted from the market to give insight into the markets growth and breadth, this was in addition to taking a look at major stocks that gained and lost value in 2018. The section also takes a look at traded instruments such as ETFs and REITs which are just beginning to gain momentum.

Section 4 of the report addresses sectors of the financial market in general and the stock market in particular. It takes a detour to review the annual performance of the:

1.         Financial Services Sector

2.        Consumer Goods Sector

3.        Oil and Gas Sector

4.        Industrial Goods

5.        Healthcare

6.        Agriculture

7.        Sectoral Market Capitalizations

Each of these sectors have demonstrated unique characteristics that have defined their annual market yields and explain why equities listed under each category performed the way they did in 2018.

The report’s section 5 takes a general look at the economy taking into account its different financial markets and weighing the implications of 2018 actions or inactions of participants and how they will affect market outcomes in 2019. 

The report concludes with a directory to help users of the report establish contact with the market. Generally, we have adopted the most ‘helpful’ approach under the circumstances; and hope that this report will guide you in decision making as you engage the Nigerian Capital Market.

Outlook 2019

The global economy in 2019 is likely to remain slow as several economies begin to feel the pinch of lower consumer demand and falling incomes as trade conflicts between China and America and trouble within the European Union (EU) dampen output and trade; the World Bank has already revised growth projections for the year downwards from +3.8% to +3.5%.

Africa is not left out of the trade and growth meltdown. With commodity prices dipping and almost all African countries dependent on primary export goods, the outlook for African economies is majorly uncertain. A lot will depend on:

·         Resolution of recent Sino-American trade dispute

·         Expansion of the slowing Asian economies of China and India

·         Rebounding of international oil prices

·         A rise in the prices of non-oil agricultural exports from the continent

·         Reduction in domestic debt service

·         Reduction in rampant fiscal leakages

·         Reinforcing policies to promote private sector expansion

A crucial problem in Africa is lack of growth of the continent’s industrial sector; this has made the continents commodity markets vulnerable to changes in Western and Eastern markets. The lack of internalization of production through deepened intra-continental transactions has worsened the continents global terms of trade. This will not change in 2019 or even in 2020, the necessary structures and policies needed to see this happen are yet to be agreed, approved and implemented.

Do feel free to share your opinions/observations and feedback with us videcontent@proshareng.com and/or research@proshareng.com

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