Lull In Capital Market Deepen, As Stocks Further Devalue

Nigerian Stock Exchange

Nigerian Stock Exchange

The Capital Market has lost N2.5 trillion since May 29 when the new government came in, while experts caution on the need for perseverance. They also called for a firm course of action from government, which will at least provide a soft landing for the market to bottom out.

Major stock indexes are being hit hard, reaching the lowest levels since November 2014. When President Buhari was announced winner of the 2015 Presidential Elections on March 31, 2015, the All Share Index recorded about 10 straight days of gains, as investors basked in the excitement of a peaceful election. On the day the result was announced the market gained 8.3 per cent, followed by another 3.9 per cent gain within the same period.

Since then, the stock market has recorded months of volatility as investors are kept in the dark about the economic policies of the government. The fall in oil prices, dithering by the CBN on forex policies, corruption allegations against past governments, bankrupt states, drop in GDP and rising unemployment have all contributed to the negative outlook of the Nigerian economy, thus damaging investor sentiments further.

This has now resulted in massive loss of value for the exchange. As at end of August, stocks have lost a massive N2.46 trillion in value. From a market capitalisation of N12.13 trillion in early April 2015, it closed at N9.67 trillion at the end August 2015.

The stock market has lost N1.89 trillion since May 29. It has not climbed above N11.6 trillion.

Now, how do the portfolio mangers cope with the lull in the market?

The Managing Director of Marina Business School, Olayinka Odutola explained: “In any persistently bear market, like the kind of situation we are having in Nigeria as at today, the watchword is, do not lose money. That is, if as a portfolio investor I found out that I cannot make money, the next thing I should consider is how not to lose money.

“This is a reasonable wealth protection strategy that has stood the test of time. In a bid to achieve this, an average portfolio investor may tend to use ‘portfolio diversification’ in order to manage the risks of volatility being witnessed today. By diversification, it simply means that you should not put all your eggs in one basket, that is, you should avoid portfolio concentration. In other words, you should spread your investments among several companies with good fundamentals, rather than concentrating on very few companies that are generally believed to be performing well than others.  In order to avoid losses when there is a lull in the market therefore, a portfolio investor needs to be keenly monitoring his portfolio and be very active with the use of this diversification as opposed to concentration.”

Another strategy to survive a lull in the market, according to him, is to invest in stable companies with good dividend payment history. “Such companies also tend to grow earnings faster than those that do not pay dividend as and when due, so this ‘reputation’ leads to higher price gain, all other things being equal.

Continuing, he said, “Such shares do not have the tendency to drop sharply like others and we have good examples of some of these companies in Nigeria of today, both in banking and non-banking sectors.”

Some analysts believe insurance sector is worst hit.  The president of Constance Shareholders’ Association of Nigeria, Shehu Mikail, said that when it comes to investment in insurance companies, an investor would never gain a better result from the investment.

According to him, there is never a proper corporate governance among the insurance companies in Nigeria because boards of some insurance companies believe that a company can be administered as one man business.

“Some lack focus to fashion out better policy that would bring better result. Looking into the objective of Nigeria Insurance Association, most of our insurance companies do not care about the way forward to bring out better implementation to solidifying the insurance industry, whereby the population of over 160 million would be able to show interest in insurance policy, in spite of the Regulatory Authority support to boost the industry.”

Now, what should be market expectations for the last quarter?

Dr. Temitope Oshikoya, an economist and the Chief Executive Officer of Nextnomics Advisory explained that the NSE ASI and market capitalization fell by nearly 13 per cent and nine per cent in half-year (H1), up to June 2015 reflecting the impact of devaluation of the naira, pressure of oil prices decline, and uncertainty in respect of fiscal policy direction.

According to him, these macroeconomic factors combine with poor company results to ‘dampen investors’ confidence, especially domestic investors.

In his words: The Name and Shame strategy with regard to banks’ debtors also forced some affected investors to sell equities across the board. The poor performance of the equity market was broad and spread across the sectors as portfolio managers dump stocks for money market instruments.

“Banks bear the largest brunt of the lull in economic activity and specific monetary and financial policies, while the consumer sector felt the impact of lower disposable income and higher operating costs due to both devaluation and inflation. The decline in oil prices weighed heavily on oil and gas sector in H1.

“The rest of H2 should be divided into third quarter and fourth quarter. In third quater, investors are likely going to continue to dump stocks until the fiscal team and policy direction become clearer in September 2015.”

The Banking sector earnings will continue to come under pressure, especially with the tight monetary policy, rising NPL from the SMEs sector, the implementation of the Treasury Single Account (TSA), which will plug fiscal leakages and access to low-cost and cheap public sector deposits, and improved surveillance in the foreign exchange market. Consumer and oil sectors will also continue to be pressured by the impact of low oil prices, devaluation and higher inflation rate.

“From fourth quarter, markets should stabilize and pick up with bargain hunting and value investors, including foreign portfolio investors making some come back once the Cabinet is announced and fiscal policy team and direction are firmly in place,’’ he said.

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