Stock market outlook bearish on pessimism, political uncertainty

The ongoing downward spiral in the Nigerian stock market would continue in the near term till after the general election in 2019, according to market analysts.

Analysts from most investment and trading houses who spoke to business a.m. say the negative sentiments are being spawned by the obvious acrimonious electioneering campaigns and the manner the two leading political parties are approaching the primaries.

They contend that this has made most investors to be apprehensive and are primed to embark on sell-offs till after the election.

“The Nigerian stock market will likely experience a substantial correction swinging towards the bear territory (20% to 40%) in the near term. The negative sentiments caused by the widespread pessimism and political fracas will maintain the downward spiral of the market, at least until after elections in 2019,” analysts at Financial Derivatives (FDC) noted in their economic bulletin update released September 20, 2018.

The outflow of hot money in the form of foreign portfolio investment (FPI) reversal has adversely affected the performance of the market, especially given political squabbles and unfavorable government policies.

Monthly FPI transactions on the NSE declined by 78.3% in July to $118.5mn, compared to January; and 64.7% below June 2018 trading value.3 This postulates that foreign trades on the stock exchange will further stall in the short-term.

In addition, the controversy between MTN and the CBN and Attorney General of the Federation has put the bourse under immense pressure. This further intensified the withdrawal of hot money and could delay the impending listing by the telecoms giant, which was expected to increase market capitalization by about N2 trillion. As a result, the NSE ASI lost 8.6 percent following the announcement of the government’s decision on August 29th.

Indeed, the NSE All-Share Index (ASI) got off to a good start at the start of 2018, as it gained 16 percent in January alone, but the tides have taken a quick turn since then, as the index lost 27.1 percent of its value in the 8 months that followed.

According to Financial Derivatives Company (FDC), this loss can be linked to a plethora of endogenous and exogenous factors from election uncertainties to investors seeking higher real yields in advanced economies.

Sectoral indices performance at the stock market reveals that weak demand for securities is undermined by abundant supply with all sub-sectors in a negative year-to-date position.

Of the five major sub-sectors the consumer goods index (-21.91%) recorded the highest decline so far in 2018 going by figures from the NSE as at 21st September 2018.

The decline is largely as a result of the beer wars and the initial introduction of excise duties on alcoholic beverages, spirits and tobacco. This weighed on the enterprise value of these stocks, which rendered them underweight relative to other investor portfolios.

The industrial index has also lost 21.55 percent of its value, as the impressive financial performance of the most capitalized stock (Dangote Cement) was not enough to overturn the negative investor sentiments.

This is coupled with the inadequate internal efficiencies among the other industrial stocks, limiting the attractiveness of these stocks.

Other indices such as the banking, the oil and gas and the insurance indices have a negative year-to-date return of 15.59 percent, 12.37 percent and 10.95 percent respectively.

As at the first half of September, the bourse’s loss of 7.23 percent remains the highest loss within a 2-week period so far in 2018.

The market also recorded the highest daily loss of 3.46 percent during the same period, causing market capitalization to drop below the N12 trillion mark.

Consequently, the year-to-date loss of 14.91 percent affirms that the bourse is now in correction having dropped by more than 10 percent.