Govt as Metaphor for Market Volatility

By Sola Oni

Equity investors in Nigeria are navigating choppy waters. They sleep and wake with more downswing than 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 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 panic button whenever they spot oppotunities for superior return on investment anywhere. There is an inverse relationship between money market and capital market. For instance, whenever the  interest rate is low, speculators take  flight for safety and move their money to 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, market is bullish. When they  sell  bearish market resumes. Although corporate earnings among other variables influence investment decision 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 overdwarfed 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 direction of trading in the capital market.  It operationally appears as golden share for the CBN. At the moment, stakeholders in the Capital Market ecosystem are languishing in uncertainty. If checked, emotional temperature of every market participant will be running high. Uncertainty has continually exposes the market to needless volatility. Everyone is nervous. Projections are difficult to make and every forecast is wrapped in proviso .

Let us separate signal from the noise. The Federal Government is the agent of uncertainty, and mother of market volatility. Government has  not been able  to fix the economy. Macroeconomic vagaries is widening by the day. At 33,33 percent, Nigeria’s unemployment rate is said to be the second highest on 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 on the unenviable league of the most miserable countries in the world. Srock 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 have further worsened the precarious state of the economy by increasing the country risk.  It is no longer news that financial press is replete with screening headlines of what investors lose from the market. But such stories hardly include the fact that 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 holiday and deliberate patronage of products and services could be dangled as carrots  to attract Small and Medium Scale Enterprises (SMEs) to seek quotation while cost of listing and other market charges should be pocket-fruendly 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 Masterplan 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 anticipated growth of cyclical stocks in discretionary industries such as airlines and restaurants. But the firm warned that likely increase in inflation could reverse broad market gains, especially in expensive 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  forecast for the Nigeria’s stock market where 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 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 cold.

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