Government as metaphor for market volatility

Equity investors in Nigeria are navigating choppy waters. They sleep and wake with more downswing than an upswing. The market ended bullish last year despite the impacts of COVID-19 on operations of the quoted companies and many investors became instant millionaires.

By Bloomberg’s report, in 2020, The Nigerian Stock Exchange posted a one-year return of +50.03% to top S & P 500 (+16.26%) and Dow Jones Industrial Index (+7.25%).



The market late last year was largely driven by the low yield on the fixed-income securities policy of the Central Bank of Nigeria (CBN). Much as speculators are desirable as providers of liquidity into the market, they do this with decorum. They press a panic button whenever they spot opportunities for superior return on investment anywhere.

There is an inverse relationship between the money market and the capital market. For instance, whenever the interest rate is low, speculators take flight for safety and move their money to the equity market for superior return and vice versa. This is why institutional investors, including pension funds, take advantage of every opportunity provided by MPR to set the tone for the market. When they buy, the market is bullish. When they sell bearish market resumes. Although corporate earnings among other variables influence investment decisions on the stock market. the management of Monetary Policy Rate (MPR), the nominal anchor, by the CBN, is a single factor that drives the market in recent time. It is on this basis that one can explain what has become a  zig-zag market trend.

An equity investor with a long-time view of the market can become an instant millionaire when the CBN lowers the  MPR but the same investor may helplessly watch his wealth dipped in a matter of days. Fixed income securities are good for risk averters. The return on investment is known at the beginning.

The securities offer opportunities for diversification, capital preservation, and income generation. But the two major downsides of fixed-income securities are inflation and default risks. The yield on fixed-income is fixed and does not increase with the pace of inflation. In the ongoing regime of stagflation in Nigeria, investors in fixed-income are not receiving normal value for their investment. Default risk depends on the quality of the issuer. But government bond ranks higher than corporate bonds.

At the formative stage of The Nigerian Stock Exchange, trading on fixed-income securities over dwarfed equities. But when stockbrokers slept, bankers took over the juicy food from the table.  It is now that securities traders are warming up to reverse the trend.  

Every decision taken by the apex bank on the MPR is indicative of the direction of trading in the capital market.  It operationally appears as a golden share for the CBN. At the moment, stakeholders in the Capital Market ecosystem are languishing in uncertainty. If checked, the emotional temperature of every market participant will be running high. Uncertainty has continually exposed the market to needless volatility. Everyone is nervous. Projections are difficult to make and every forecast is wrapped in the proviso.



Let us separate the signal from the noise. The Federal Government is the agent of uncertainty and the mother of market volatility. Government has not been able to fix the economy. Macroeconomic vagaries are widening by the day. At 33,33 percent, Nigeria’s unemployment rate is said to be the second-highest on the global list. Headline inflation rose to 17.33 percent in February, the highest in four years. It is therefore not surprising that Misery Index is 15.75 percent and this comfortably puts Nigeria in the unenviable league of the most miserable countries in the world. Stock market mirrors the economy and until the economy rebounds and quoted companies operate optimally, the capital market may not have respite. News of killing, maiming, and wanton destruction has further worsened the precarious state of the economy by increasing the country’s risk. It is no longer news that the financial press is replete with screening headlines of what investors lose from the market. But such stories hardly include the fact that a bullish trend is a buy signal as prices of blue chips with strong fundamentals are affordable. The worsening security profile of Nigeria may have prompted the British Envoy, Catriona Laing to say that the country was struggling and needed help. 



Transactions on Nigerian Capital Market should not depend solely on the movement of MPR. Government’ should do a lot more to deepen the capital market. Over the years, stakeholders have consistently leveraged every forum to advise the Government to utilise the market to finance infrastructure. Moribund Government enterprises should be privatised and listed on the market. Incentives such as tax holidays and deliberate patronage of products and services could be dangled as carrots to attract Small and Medium Scale Enterprises (SMEs) to seek quotation while the cost of listing and other market charges should be pocket-friendly for every participant.
What stops the Federal Government from privatising the Nigerian National Petroleum Corporation (NNPC) or part of it and list the shares on the securities exchange to deepen the market?  What about some companies in the downstream sector of oil and gas? When will the pension funds’ participation in the market be reviewed for increased activities? Impact analysis of the Capital Market Masteplan is desirable to align the content with the current realities in the operating environment. 



In their forecast for 2021, Morgan Stanley, Wells Fargo, and LPL, Financial expect S & P to grow by 6 percent as against Goldman Sachs’ projection of 17 percent upside. Morgan Stanley hinged its forecast on the anticipated growth of cyclical stocks in discretionary industries such as airlines and restaurants. But the firm warned that a likely increase in inflation could reverse broad market gains, especially inexpensive growth stock. According to Morgan Stanley, if such happens, S & P may plunge as much as 8 percent. 



The Wall Street experts should come and make a forecast for Nigeria’s stock market where an increase in inflation has instituted a regime of negative return on investment. The Group CEO of the newly established Nigerian Exchange Group PLC (NGX Group), Mr Oscar Onyema had earlier based his expectation of The Exchange’s performance for this year on cautious optimism. This was his position while appraising the 2020 market performance in January this year. The soft-spoken Executive cannot afford to play to the gallery. Onyema knows the power of the invisible hand of MPR on the performance of The Exchange. Unless the government addresses the issues that can bring about a genuine market rebound volatility may continue to stymie investor confidence in the market.  At the moment, when the CBN sneezes, the market catches a cold.


Oni, Communication Consultant, Chartered Stockbroker, and Commodity Trader, is the Chief Executive Officer, Sofunix Investment and Communications.