NCM2020 - Fin. MKT in Transition: Understanding Past Uncertainties; Preparing for New Possibilities


Monday, January 20, 2020 / 07:00 PM / By Proshare Research/ Header Image Credit: EcoGraphics


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Executive Summary

"You only have to do a very few things right in your life so long as you don't do too many things wrong"- Warren Buffet

The Warren Buffet quote is particularly important at a time of growing uncertainty in global financial markets. The Nigerian financial market in 2019, for instance, saw a two-track development of equity prices slumping and treasury yields rising for the better part of the year. Investors (especially foreign portfolio investors (FPI's)) on witnessing a softening equities market piled into the fixed income market with enthusiasm as domestic treasury yields at between 11.5% and 14% stayed ahead of average annual inflation rate until November 2019 when inflation rate rose to +11.85%.


The Financial Market in the previous year saw mixed developments ranging from declining stock prices for large-cap stocks (the Nigerian Stock Exchange's All Shares Index (ASI) lost -14.60% in value by the end of the year), H1 growth in treasury yields (until Q4 2019) and a mild devaluation of the naira in foreign exchange markets (the N/US$ rates fell from N360/US$ in Q1 2019 to N364/US$ in Q4 2019 at the NAFEX window and from N305/US$ in Q1 2019 to N306.4/US$ in Q4 2019 at the official window). The consequence of the various market actions in the year was that investors became increasingly ambivalent about where to keep their surplus funds. While some bailed out of the equities market and stayed close to cash others went into government treasury instruments. 


Indeed, by H1 2019 up until Q3 of the year, investor's obvious choice for investible funds was government-guaranteed instruments, especially as the inflation rate had started declining to a one-year low of +11.02% in August 2019, which was +0.35% lower than the +11.37% in January. The real estate end of the Financial market saw modest growth in the year mainly as a result of declining international oil prices. A review of the sector in Nigeria showed that the market tended to strengthen when international oil prices rose and weakening when oil prices dipped. The relationship between the sector and oil prices appears to be that low oil prices hinder GDP growth and higher oil prices promote faster GDP growth. The faster growth of GDP seems to lift 'all boats,' including the real estate sector.


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Into The Deep

In this year's report of the Nigerian Financial Market for 2019, a variety of market plays were analyzed, ranging from equities to fixed-income securities, mutual funds and real estate investments. Section 1 of the report reviews developments in the global economy, noting the impact of the Sino-US trade conflict on global growth rates and international oil market prices. It notes that most developed countries have adopted various forms of quantitative easing to stem recession headwinds. Following these advanced economies, some emerging market countries have also cut interest rates to stimulate domestic growth. The International Monetary Fund (IMF) had forecast growth of +1.7% for advance economies in both 2020 and 2021. The international agency also forecast that the USA would likely show a growth rate of +2.4% in 2019 and +2.1% in 2020. The Eurozone area is likely to see much slower growth in GDP, estimated at +1.2% in 2019 and +1.4% in 2020.

Africa In Perspective

Section 2 of the report looks at African economies and highlights the mixed economic performance across the continent. The report observes that African economies are increasingly shifting from consumption-based economies to investment-based ones. African economies in 2019 showed the following:


  • Restrained expansion as a result of a slowdown in global economic growth
  • Narrow trade growth as a result of Sino-US conflict and European Union economic fragility
  • Poor weather conditions leading to relatively weak agricultural output

The continent was expected by the African Development Bank (AfDB) to grow by +4.00% in 2019 and +4.1% in 2020. However, the recent World Bank report released in January 2020 has a different perspective. It expects Sub-Saharan African economies to grow by +2.1% in 2019 and +2.9% in 2020. Three of the largest economies on the continent, Angola, Nigeria and South Africa, were and will continue to be a drag on Africas' growth in 2020.


The equities market performance of the continent has been mixed, with some surprises. In the category of surprises, Zimbabwe, a country with severe inflationary challenges and fiscal difficulties, saw its Stock market grow by + 56.12%. Less surprising was the growth of the Kenyan Stock Market which rose by +17.79% on the back of a +5.56% growth in GDP between 2014 and 2018. South Africa's market despite rising unemployment, power outages and slower manufacturing sector growth, was able to rustle up a market growth of +11.19%. In contrast to South Africa's good equity market fortunes, Ghana saw its equity market slide by -12.53% despite a growth in GDP of +5.6% in Q3 2019 and judging by a recent World Bank forecast for 2020, is likely to grow by +6.8%. The Nigerian equity market toppled by -14.60% in Q4 2019, struggling in the face of slow GDP growth with Q3 2019 GDP growth rate at +2.28%. High domestic bond yields in the fixed income market meant that investors dumped equities for higher risk-free returns in government treasuries.


A Bird's eye view of Nigeria's 2019 Economic Growth

Section 3 of the NCM report took a snapshot of economic growth and development in Nigeria in 2019. The report noted that the growth rate of GDP was +2.28% in Q3 2019 and forward forecast for full-year is equally below +2.50%. Analysts expressed concern about the slow growth rate of the economy as the population growth rate is still progressing at +2.6% according to the 2016 population survey. The fall in the country's GDP per capita suggests rising levels of absolute poverty and savings and consumption. Perhaps, on the good side was the rise in the country's agricultural sector contribution to GDP from 21.89% of Q1, 2019 to 29.25% of Q3, 2019. However, 2019 saw a fall in non-oil sector contribution to GDP from 90.78% in Q1, 2019 to 90.23% in Q3, 2019, while oil sector contribution increased from 9.22% to 9.77% Q3, 2019. The rising importance of the oil sector to GDP belies the Federal Governments' efforts at diversifying the economy away from oil.


The inflation rate from January to October ranged between +11.0% and +11.61%. The recent rise in the inflation rate to +11.85% resulted from the closure of the country's land borders and forex exchange restriction on selected commodity imports. The central bank had said that Community development initiatives would help combat the rise in inflation and serve as a cushion to the adverse effect of the closures of borders.  The community development initiatives to finance the agricultural value chain of ten ((10) commodities, namely, Cassava, Cocoa, Cotton, Rice, Tomato, Poultry, Livestock and Dairy, Fish, Oil Palm and Maize, which has received N171.66bn in funding. Four of these crops received over N140.12bn or 81.6% of total disbursements (Cassava, N11.44bn; Cotton, N40.47bn; Rice, N53.40 bn; Oil palm, N34.81bn).


Economic growth in Nigeria in 2020 will still largely depend on the international price of oil and would require policy adjustments to domestic subsidies and foreign exchange policy.

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2019: A Harsh Year for Equities

Section 4 of the report reviews equities market performance. The report looks at the Nigeria Stock Exchange All Shares Index (ASI) performance on a monthly and quarterly basis. The section also analyzes the markets trading statistics for 2019, looking at the market's highs and lows, and the performances of so-called "penny" stocks.  The section takes a look at stocks that were listed and delisted in the year while also reviewing the outlook for selected sectors.


Risk-Free Freedom and Rewards

Section 5 of the report reviews the performance of the fixed income market and comments on the market outlook in 2020. It reviews the state of Treasury-bills, Eurobonds, Fixed Income and Currencies (FIC), savings and other deposits and foreign exchange transactions (FX). The section explains the yields that occurred in the fixed income market and the sharp change that happened in Q4 2019 when the Central Bank of Nigeria (CBN) changed the rules of participation in open market operations (OMO).


Discovering Other Assets

Section 6 of the report looks at other financial asset categories and reviews the performances of mutual funds, the real estate market, derivative market, commodity market, and currency market. With equity prices falling and bond yields flattening, investors obviously looked into alternative assets to protect their portfolio yields, unfortunately not much solace was found in other asset classes as the general downturn in the economy affected other markets to a varied extent.


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Rearview Foresight

Section 7 of the NCM survey took a decade-long detour to analyze market performance since 2010. The equities market performance over the last decade varied with the market tumbling four (4) times and rising five (5) times, implying uneven value growth and high potential market risk over the last decade.   The market's performance appeared tied linearly to the international price of crude oil and the rise and fall in dollar-based annual fiscal revenues. When oil prices rose, the NSE ASI also went up but when prices fell, the ASI took a tumble, suggesting that international oil market conditions serve as good predictors of domestic stock market performance, at least in Nigeria.   The fixed income securities market did better than the equities market in the last half-decade with the Fixed income marketing rising consistently in the last three of the past four years. Fixed income market turnover increased by +24.97% in 2017 and +28.75% in 2018 before moderating to +6.43% at the beginning of Q4 2019. The mutual funds market's net asset value (NAV) showed a similar pattern over the last decade with NAV rising by +90.39% in 2017 and +48.41% in 2018 before bouncing back up to +56.11% in 2019. The year 2020 market performance will equally be determined by external factors in the trade and oil markets as much as domestic fiscal and monetary policy.


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Strengthening Governance; Fashioning Rules

Section 8 of the report reviews major regulations and rules by different financial regulatory agencies in 2019. The largest number of regulations churned out in 2019 was by the CBN which introduced guidelines for credit concentration, management of interest rate risks, reputational risk and stress testing of domestic money banks (DMBs). The money market regulator also introduced other guidelines in respect of bank loan to deposit ratios (LDRs), risk-weighted assets (RWA) and capital adequacy ratios (CARs).


The CBN introduced regulations of Bankers Acceptances (Bas) and Commercial Papers (CPs) amongst a few others. The Securities and Exchange Commission (SEC) released its exposure draft for a review of the Investment and Securities Act 2007 (ISA 2007), in addition to new rules for Issuers of securities and dealing members. The Asset Management Company of Nigeria (AMCON) equally saw a 2019 amendment to its Act to broaden the loan resolution agency's powers. The FMDQ Exchange in collaboration with the CBN, developed the Fixed Income Securities Investment Clients Services ("FISICS") Guidelines in February 2019. The NASD also saw SEC approving new rules for executing negotiated deals on the NASD OTC. The various reviews of guidelines and regulations in 2019 were to ensure a more transparent, efficient and governance-driven financial market. 


The report shows that at continental and domestic financial market levels, economic and financial managers have gotten a few things right and some things wrong, but as Warren Buffet had admonished, what is critical is that the number of things gotten right outweighed the things done wrongly. 


Do feel free to share your opinions/observations and feedback with us vide and/or


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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
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