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Political tension and equity market watch

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Nigerian Stock Exchange


The level of political developments in Nigeria in recent times appears to be having a toll on the economy, particularly the equity market which is generally regarded as the barometer of the economy even in emerging markets and developed democracies. In those societies, the markets are known to be very efficient such that all available public and private information in the economy is quickly transmitted to the capital market with the prices of securities clearly reflecting this trend.

In Nigeria, this transmission of all available information is still largely weak; hence the stock markets in Nigeria and most other developing economies are generally regarded as weak-form efficient. Thus largely, the prices of stocks in the Nigerian market are not a true reflection of all information in the economy, whether company or industry-related or even political. This is the reality that political leaders and those aspiring to lead should face.

Given this background, the recent and persisting downturn in the Nigerian equities market is quite worrisome, given that it could have been different if the market were strongly efficient. The market indicators have slumped for close to 16 months now, since the second half of 2017 run with the Nigerian Stock Exchange All-Share Index falling from the previous month by 1.25 per cent in September 2018 to close at 33,611.69, while market capitalisation shed N155.6 billion to close at N12.27 trillion. Before the slump, the goings in the market were quite good.

In 2017, the Nigerian Stock Exchange was ranked best performing in Africa and also ranked the third best in the world by ‘CNN Money’ after recording a whopping 48 per cent returns on investments during the year. With the downturn, as at Tuesday, September 3, 2018, the Nigerian Stock Exchange All Share Index had fallen by -11.3 per cent year-to-date. This fall, however, has not been limited to the Nigerian market alone. The BVRM, the market for the francophone West African countries, based in Abidjan also had a negative return of -11.1 per cent year-to-date. Other African markets that also fell include Morocco Stock Exchange, with a -7.1 per cent negative return and the Johannesburg Stock Exchange, with a -1.3 per cent negative return.

However, on the positive side, other markets on the continent, such as the Tunis Stock Exchange, grew by 33.4 per cent over corresponding periods followed by the Zimbabwe Stock Exchange, ZSE, and Ghana Stock Exchange, GSE, which rose by 21.8 per cent and 7.9 per cent respectively.

Some analysts have argued that, in the case of Nigeria, the slump in the market has not really reflected the true state of the economy as the current trend is not necessarily a true reflection of the fundamentals of companies, adding that opportunities still remain in the market. Given this background, this view suggests that the country’s macroeconomic fundamentals remain supportive of long-term gains in the market and that lack of investor confidence and frequent sell-offs are the factors responsible for the continual slump in the market.

On the other hand, other analysts opine that if investor confidence is low, then the causative factors should be traced before a solution can be found for the loss of value in the market. They point out to the overwhelming influence of the political developments coupled with uncertainty as to the direction of present and future economic policy concerning operations in the market.

As is often said, in every politics, there’s economics. All over the world, political developments drive the nature and direction of economic development. So we need to get our politics right, in order to guarantee desirable economic outcomes. The increasing tempo of political activities in Nigeria has been evident with the political parties having their primaries to select candidates for the various elective positions in preparation for the 2019 general elections.

With the campaign season commencing in earnest, one may still expect a further bashing of the Nigerian stock market. This is because the policies of the present government have largely scared away foreign investors with the exchange rate margin between the Central Bank official rate and that of the parallel market significantly wide. Foreign debts are just skyrocketing and more than half of government revenues used to service interest payments. In addition to these, Nigeria has been recently classified as the poverty capital of the world with the rate of unemployment skyrocketing beyond expectations.

These all affect the general economic outlook with significant impact on the stock market. Investors are uncertain whether this trend will continue. This would depend on whether President Muhammadu Buhari is re-elected or whether there could be a policy reversal if a new government is inaugurated on May 29, 2019. With this level of economic uncertainty due to the intensification of political developments, it would not be surprising if more sell-offs take place in the market with further dampening of investors’ confidence, leading to further fall in the stock prices.

This newspaper believes that this period calls for calm and caution by all stakeholders in the capital market – the regulators, the operators and the investing public. The regulators would need to watch the operations in the market closely to address any untoward infractions to quickly nip any unexpected crises in the bud. They may need to enhance the role of market makers to ensure the stability of the market. For the operators, they should avoid unnecessary speculation in the market, which may escalate the slump. For the investors, this current state of affairs may actually indicate that this could be the best time to invest more in the market with the current low prices, with the hope that the market will quickly rebound after the elections. This is what can sometimes trigger a bountiful harvest. It is hoped that risk analysts within the economic management team in Abuja and 36 state capitals are taking note of this market intelligence.


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