Why Nigerian stocks are Africa’s cheapest
An equity market report which showed that Nigerian stocks are at present regarded as the cheapest in Africa, in relation to other major economies on the continent such as South Africa, Egypt, Kenya and Ghana sounded incredible but it is true. But the investing public needs to understand the times, shun risk unlike foreigners and invest at this time.
The verdict on a crucial aspect of the country’s economic development does not show that current authorities in Nigeria take management of the economy as a serious governance issue because it has been with us for some time and market analysts drew attention to the critical factors, in this regard more than three years ago.
Therefore, a report on current low prices of stocks in Nigeria leaves much to be desired in the growth and stability of the country’s equity market. According to Bloomberg data, companies’ return on equity climbed to 15% by September 2018 ending, the highest since 2014 and thus investors pay more in Nigeria, to hold stocks than in the peer African markets.
Across the world, stock prices have generally tumbled, though the case of Nigeria is somewhat linked to the state of the economy, the oncoming elections and the fluctuating nature of international price of crude oil.
According to Investopedia, a New York-based investment outfit, stocks worldwide tumbled recently after weak economic data from China and Europe fanned concerns of a global business slowdown and left investors fretting over the wider impact of a still-unresolved Sino-U.S. trade dispute. This cuts across many countries. For example, the Euro zone business ended the previous year on a weak note. All these add to weak readings from China, where retail sales grew at the weakest pace since 2003 and industrial output rose the least in nearly three years, underlining risks to the economy with the country working to defuse a trade dispute with the United States.
The trade tensions are weighing heavily on stock prices worldwide, with equity indices in countries that are particularly dependent on exports for economic growth being especially hard hit, according to The Wall Street Journal reports. Already, 14 major stock indices have dropped in countries such as China, Italy, Germany, South Korea and Mexico, which have suffered bear market declines of 20%. Generally, similar to recession, bear markets in stocks spread worldwide dissipating contagion and fears to the global economic and financial system.
The recent and persistent downturn in the Nigerian equities market, though worrisome, is not too different from the global trend. Since the market here is not too efficient, it does not efficiently absorb economy-related information. The market indicators in this country have slumped for close to 17 months now, since the second half of 2017, with the Nigerian Stock Exchange All-Share Index falling from the previous month by 1.25 % in September 2018 to close at 33,611.69, while market capitalisation shed N155.6 billion to close at N12.27 trillion.
In 2017, when the going was good, the NSE was ranked best performing in Africa and the third best in the world by CNN Money after recording a 48 % returns on investments during the year. But all that has changed at present. With the downturn, the NSE All Share Index had fallen by -11.3 % year-to-date, by September 2018. Other African markets that also fell include Morocco Stock Exchange, with a -7.1 % negative return. The Johannesburg Stock Exchange recorded a -1.3 % negative return.
Specifically, in Nigeria, the continual exit of foreign investors as well as less appetite of local investors, amid an uptick in bond yields has exacerbated the decline in the market. The loss in the market is almost 20% on a date-to-year basis, by December 2018. Secondly, the dynamics of oil, the lifeblood of the economy and its renewed fluctuation, has pushed stock prices lower. Some analysts point out to the overwhelming influence of political developments, due to the imminent general elections in addition to the uncertainty as to the direction of present and future economic policy concerning operations in the market, as other causative factors.
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. Besides, foreign debts are just skyrocketing and more than half of government revenues are currently being 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.
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.
The easier way out for the revival of the market is for the local investors and the general public to express their renewed interest and confidence in the Nigerian economy, by investing in the market. No foreigner will do it for the nationals, except in cases where returns are overwhelmingly attractive. Yes, foreign investors are needed to grow the market, but the indigenes need to take advantage of the current cheap price of stocks in the market and enhance both their personal economic circumstances as well as that of the nation, with positive returns in the not-too-distant future.
Therefore, drivers of the market, national orientation agencies and elite socio-economic clubs in the country should be involved in some forms of civic education on the benefits of the investing public taking advantage of the lull in the market to invest at this time. That risk is worth taking. There will certainly be returns on investment after the turbulent political times.
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