The Nigerian stock market performance in 2016 left little to cheer about as major indicators remained in the negative territory for much of last year reflecting the realities of a weak economy. While equities market capitalisation lost 6.2 per cent dipping from N9.86tn on January 1, 2016 to N9.25tn on December 30, 2016, the Nigerian Stock Exchange All Share Index shed 1,495.7 points over the same period to close year at 26874.62 points from 28370.32 points on January 1, 2016. About 35 per cent of the 168 stocks listed on the main board of the NSE recorded no price movement in 2016 with the financial services sector accounting for the largest number of inactive stocks. There was also a significant decline in foreign activity with highest drop of 73 per cent recorded in April 2016.
The performance of the stock market in 2016 mirrors the downturn in macroeconomic indicators. According to data from the National Bureau of Statistics, the country’s Gross Domestic Product contracted by -0.36 per cent, -2.06 per cent and -2.24 per cent in the first three quarters of 2016 respectively. Within the same period, massive job loss was recorded leading to an increase in the unemployment rate from 12.1 per cent in the first quarter to 13.3 per cent and 13.9 per cent in the second and third quarters of 2016 respectively. Headline inflation jumped to 18.48 per cent in November from 9.6 per cent in January 2016.
Given the import-dependent nature of the Nigerian economy and the fact that oil revenue accounts for over 90 per cent of the country’s forex receipts, the slump in oil revenue is easily to blame for these economic woes. The consequence has been forex scarcity, weak naira and slow implementation of the 2016 budget. Indeed, sustained depreciation of the naira due to forex scarcity fuelled bearish market sentiments in a year that saw the naira officially depreciate from N197/$1 in January 2016 to as low as N305/$1 by December with the local currency trading close to N500/$1 in the parallel market. A recent report by Bloomberg rated Nigeria’s naira as one of the world’s worst performing currencies in 2016 alongside the Egyptian pound and the Venezuela’s bolivar. Indeed, the forex scarcity, coupled with challenges in the power sector, had unprecedented negative impact on virtually all sectors of the economy, most especially the manufacturing and financial services sectors. As evidence, the manufacturing Purchasing Managers Index performed below the 50 point benchmark for the greater part of 2016 while the banking sector contended with high non-performing loans well above the five per cent threshold.
In 2017, investors in the stock market are likely going to exhibit positive sentiments as several factors will combine to shore up confidence and bring about a rebound in stock prices. A major reason for this optimism is the expansionary impact which the N7.298tn 2017 budget is expected to make on the economy. The implementation of the N2.24tn capital component promises to enhance employment generation capacity for the productive sector. Obviously, the huge investment in infrastructure is crucial to reducing cost of doing business and improving the attractiveness of Nigeria as an investment destination. The government spending on housing and infrastructure is expected to have a direct impact on companies like Julius Berger Nig Plc and Dangote Cement Plc where current valuations are still considered attractive.
Bright global outlook will equally rub off positively on the domestic economy with global GDP growth rate, by World Bank estimates, expected to rise to 3.4 per cent in 2017 from 3.1 per cent in 2016. Of particular concern will be developments in Britain, the USA and China. The first two remain the greatest sources of foreign portfolio investments in Nigeria according to the National Bureau of Statistics. Since the Brexit vote, the Bank of England has taken a number of steps to stimulate the UK economy including a cut in interest rate from 0.5 per cent to 0.25 per cent in August as well as a huge extension of its quantitative easing programme by an additional £70bn. In fact, the Bank of England has raised its forecast for economic growth in 2017 from 0.8 per cent to 1.4 per cent. For the United States of America, the economic environment will be clearer after Donald Trump assumes office later this month. The likelihood of a US rate hike in 2017 will lead to further strengthening of the US dollar and a depreciation of the naira. In the meantime however, the US Federal Open Market Committee at the conclusion of its meeting on December 14, 2016 voted to maintain the federal funds rate in a target range of 0.5 per cent to 0.75 percent.
Furthermore, the confidence-building measures introduced by the capital market regulatory authorities will continue to have a positive impact on the stock market in 2017. These include the Investors Protection Fund meant to cushion the adverse effect of losses suffered in the capital market; the e-dividend policy designed to minimise cases of unclaimed dividend; the Direct Cash Settlement scheme which ensures that investors receive their money directly whenever securities are sold and the Corporate Governance scorecard for companies listed on the Nigerian Stock Exchange. By the same token, the capital market literacy initiatives put together by SEC and the NSE will go a long way in boosting local participation and reducing the country’s overreliance on the risk appetite of foreign investors.
Other factors that will impact favourably on the stock market in 2017 include the government anti-corruption stance as well as the success recorded in the area of tackling the Boko Haram menace. These efforts create a positive image for Nigeria in the international arena and by so doing enhance the investment climate in the country. The remarkable success in containing the insurgency will no doubt spur economic activities especially in the North-East. It is not yet Uhuru though, the security threat posed by rampaging Fulani herdsmen in many parts of the country remains a red flag for investors.
That said, the return of liquidity to the stock market will be a function of whether the market views government’s policies as supportive. Use of fiscal incentives such as tax holidays and reduced company tax for quoted companies will encourage more listings on the exchange. In recognition of the efficacy of fiscal stimulus, Ghana’s new President Nana Akufo-Addo pledged to cut taxes to “recover the momentum of our economy,” at his swearing in ceremony. In this regard, the Federal Government’s decision to reduce import duties on 115 items in various sectors of the economy bodes well for the stock market in 2017 as it will induce growth in critical sectors of the economy. The CBN should equally toe the expansionary path by reducing the monetary policy rate.
A likely rebound will also come from more listings on the Nigerian Stock Exchange. Telecommunications giant, MTN Nigeria, has said it would list its shares on the NSE in 2017 as part of a settlement arrangement with the Federal Government. Aside from MTN, other heavily capitalised telecoms companies in the country such as Eitsalat and Airtel, as well as companies in the power and oil sector should be incentivised to list on the Nigerian bourse. Listing more companies will not only deepen the market but also increase the size of the stock market in relation to the country’s GDP which is currently low relative to peers and possibly rekindle the bourse’s hope of achieving its $1 trillion market capitalisation target which was missed in 2016. It is also cheering to note that the Federal Government plans to restructure the Nigerian National Petroleum Corporation and list a new parent holding company, the National Oil Company of Nigeria, on the NSE, following the examples of Saudi Arabia that will be listing the shares of its state-owned oil company, Saudi Aramco, on the domestic stock exchange, the Tadawul, in 2017 and the Brazilian oil company, Petrobas, already listed on the Sao Paolo Stock Exchange or BM&F Bovespa.
Although the above factors will combine to ramp up activities in the stock market this year, a key risk to this optimism towards investment in equities will be the likelihood of further militant attacks in the Niger Delta region. Against the backdrop of a well-reported threat by the Niger Delta Avengers to resume hostilities in the region, the government will be well-advised to, as a matter of urgency, set up a team to negotiate with the leaders of the Niger Delta in order to prevent a return of militancy that would jeopardise the oil sector with adverse consequences for the economy and the stock market in particular.
Uwaleke, a Chartered Stockbroker, is an Associate Professor of Finance at Nasarawa State University Keffi and member of the Nigerian Stock Exchange Abuja branch Advisory Committee
Punch
END
Be the first to comment