Optimism Spikes for Stock Market Recovery

Goddy Egene writes that there is high optimism that the stock market will rebound in 2017 after three years of decline

Globally, the year 2016 was a year many nations’ economies were challenged. According to the International Monetary Fund (IMF), global economy fell short of projections as the year ended with a gross domestic product (GDP) growth forecast  3.1 per cent compared to 3.4 per cent originally projected, and 3.2 per cent achieved in 2015. The global capital markets felt the impact of the economic challenges.  The markets experienced their slowest start to the year in over a decade in 2016, as the World Federation of Exchanges (WFE) reported that value traded in cash equity markets declined by 24 per cent in the first half of 2016.

 These negative outcomes were shaped by many factors including Brexit, continued tensions in the Middle East, slump in commodity prices, fall in crude oil prices to mention a few. The huge variance in projected outcomes and actual results saw many emerging and frontier economies and their respective capital markets in dangerous territories. International capital movement was further stalled in anticipation of global policy direction.

The Nigerian market

The Nigerian  stock market recorded its third consecutive decline in 2016 with the Nigerian Stock Exchange (NSE) All-Share Index (NSE ASI) falling 6.17 per cent. The decline resulted from the poor economy performance as the nation’s economy went into recession.

Speaking on the performance of the market last week, the Chief Executive Officer of NSE, Mr. Oscar Onyema  said: “After peaking at 31,071.25 in June 2016, an increase of 8.48 per cent over the 2015 closing value, the NSE ASI began to retreat to negative territory as total foreign inflow dropped 45 per cent between June (N42.46 billion) and July (N23.43 billion) due to: loss of confidence in the implementation of an announced free floating foreign exchange (fx) regime;  weak corporate performance; and second consecutive quarter of negative economic growth in the period resulting in the economy entering into a recession.”

In their assessment of the level of foreign portfolio investments, which fell by  51.4 per cent to N473.5 billion in 2016  from N973.7 billion in 2015, analysts   at Afrinvest said the currency controls which led to the protracted crunch in the Nigerian fx market throughout 2016 continues to prevail in the current operations of the fx market.

“Thus, the persistent confidence deficit amongst foreign investors in returning to the Nigerian market due to currency, liquidity and reinvestment risks will remain a drag on capital inflows, performance of corporates and capital market performance,” they said.

The analysts said that  the disinterest by foreign investors in keying into opportunities in the Nigerian market is also evident in the performance of the Futures market which was introduced by the CBN in 2016 as a medium by which foreign investors can hedge against currency risks.

“Despite the attractive prices of the contracts on offer, percentage of total subscription stood at 31.9 per cent as at January 12th 2017 whilst none of the contracts on the calendar have been fully subscribed as investors remain wary of an overhanging liquidity risk at time of exit,” they said.

Some milestones

However, it was not all gloom as some of the indices closed  2016 in the positive territory.  For instance, the NSE Premium Board Index advanced 6.98 per cent, while the NSE Banking Index inched up by 2.17 per cent. The NSE equally recorded some  major feats across diverse business areas.

According to Onyema, the exchange moved the dial on its planned demutualisation by concluding the due diligence process, established member relations desk and credible member register and had several engagements with key stakeholder groups ( exchange members, Securities and Exchange Commission, National Assembly, Corporate Affairs Commission).

On derivatives, he said the exchange has established corporate vehicle for a Central Counterparty clearing house (CCP), engaged legal and financial advisers to support launch of the CCP, and engaged extensively with key stakeholder groups  and started derivatives product development.

 Onyema added that the NSE  also launched 13 new products to monetise its market services suite and implemented the first market data conference in Nigeria and plans to increase uptake of its services.

“On the investor protection side, the exchange launched SMARTs solution for efficient/effective market surveillance, implemented Minimum Operating Standards (MOS) and achieved 94 per cent compliance rate amongst dealing member firms. A total 83 claims valued at N27.8 million approved for payment to investors who lost money in 2016. The compliance status indicator introduced has also helped investors to track in near real compliance status of listed companies,” he said.

 Onyema noted that the period under review, the exchange increased participation its essay competition  by 76 per cent and reached 17,000 students in 250 schools across the geo-political zones.

“The exchange hosted the third edition of the NSE corporate challenge to raise awareness about cancer and funds to buy Mobile Cancer centres. Its financial literacy tour reached 15,413 beneficiaries (7,456 students) through 151 programmes. In recognition of the NSE’s sustained passion to enhance the investor experience and transcend the dynamics of the Nigerian market, it was presented some awards in 2016 namely Most Innovative Stock Exchange in Africa in 2016 by The Business Year Magazine; Corporate Achievement award for promoting financial literacy by Financial Literacy Excellence (FILEX); Employer of Choice 2016 by HR People Magazine; Capital Market Team of the Year (Corporate Category),” he said.

 Optimism for Recovery

After declining for three consecutive years, there are high optimism that the market will recover this year.    According to him, the capital market is a subsector of the Nigerian economy and the World Bank has projected that   the economy will recover from its recession in 2017 with a modest growth of 0.6 per cent.

He believes the economy achieve the projected growth  driven  by certain factors.

He said there should be vigour fiscal policy implementation, with a keen focus on articulation of desired goals.

“There should lower rates of disruptions to oil infrastructure from resolution of the Niger Delta conflict, thereby increasing fx inflows. Crude oil prices remaining above the FGN’s benchmark of $42.5/barrel positive impact of the war against corruption manifested in ease of doing business improvement and policies aimed at boosting economic productivity (improved budgetary allocation to capital

expenditures, exit from joint venture  Cash Call arrangements with international oil companies  by the  federal government, which is expected to save the

country $2 billion annually among others),” he said.

The NSE boss noted that notwithstanding the forgoing, the Nigerian capital market will have to do a better job at promoting its unique value proposition to both global and domestic investors.

“Monetary policy will continue to play a vital role in determining activity in the market. With forecasts for inflation expected to moderate due to the base effect, we believe that all things equal, monetary authorities will have more flexibility with respect to interest rates and FX regime. Hence good coordination between fiscal and monetary policy should result in resolution of aforementioned structural deficiencies and drive economic growth,” he said.

Looking forward, Onyema  disclosed that  the NSE will take an adaptive approach to strategy execution in 2017.

According to him, in  the  immediate future, the NSE will focus on achieving its goal of becoming a more agile and demutualised exchange and will fast track efforts towards developing innovative products such as exchange traded derivatives to provide investors with tools to better weather economic realities in 2017.

“We intend to strengthen our thought leadership efforts with policymakers to drive policies that will free up the system and promote the ease of doing business in Nigeria. We believe that incentive schemes for sectors of the economy that can support a pivot to export led economy will be beneficial and systematic removal of impediments to doing business and therefore reduction of leakages will attract private sector investments,” Onyema said.

He added that they  expect to see a revival of supplementary listings, return of the new issuance market, and potentially one initial public offering (IPO) since the equity market is a forward indicator of the economy.

Last year, NSE  listed  only one new issue when it admitted Initiates Plc to its ASeM Board. In January 2017 alone, the exchange has granted listing by introduction approval to Jaiz Bank and Medview Airline. These  two listings are expected to happen in first quarter 2017 while  Africa’s largest telecommunications network  MTN is being awaited to also list this year.

 Apart from Onyema, some analysts also  optimism and hopeful that 2017 will be much better. They maintained that if the country is able to achieve strong coordination between fiscal and monetary policies, flatten out the different fx rates, more investors will return to the market especially foreign investors who are still watching the developments in the economy.

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