Stock Market: Optimism after Bear Run

0

Notwithstanding a 17.8 per cent decline recorded by the stock market in 2018, the Nigerian bourse is expected to perform better this year, writes Goddy Egene

The stock market recorded a performance that sent mixed feelings among stakeholders in 2018. To some, it was a disappointment that the market could not sustain the gain recorded in 2017. But to others, given the various headwinds witnessed in 2018, the decline of 17.8 per cent was a not a very bad performance after all. Contrary to high expectations that the Nigerian equities market will sustain the 2017 positive performance in 2018, the market closed the year with a decline of N1.898 trillion while the Nigerian Stock Exchange (NSE) All-Share Index (ASI) depreciated by 17.8 per cent.
While 2018 started on a positive note with the NSE ASI rallying 15.95 per cent in the first month, the bearish trend set in the following months, which persisted to the end of the year.

Early optimism
Following the recovery in 2017 and sustained rally in the first weeks of January, 2018, operators were highly optimistic that the market would remain bullish in early part of 2018. According to them, many investors would take position ahead of positive results and dividends expected from companies for the year ended December 31, 2017.

Analysts at Meristem Securities Limited, said: “Given that we expect the Nigerian economy to maintain its steady growth, we do not expect the market to deviate from its current trend, hence, we opine that this positive momentum will be sustained in 2018, albeit at a slower pace on the back of the high base effect in 2017.”

Also speaking, analysts at FSDH Research had said the performance of market in 2017, was driven by: the increase in the price of crude oil; introduction of the Investors’ and Exporters’ (I &E) foreign exchange window leading to stability in the foreign exchange market; improved corporate earnings and the drop in the yields on the Nigerian Treasury Bills (NTBs). ”

They therefore said they expected the factors to support the market rally in 2018.
Similarly, analysts at Cordros Capital Limited (CCL), said the 2018 economic outlook favour the equities market.

Although the firm made a strong case for equities upside potential, it also considered the number of possible risks that could trigger a bear market.
“We have considered five possible triggers of the rally. The probability of the triggers is low to moderate. The possible triggers, in order of importance to Nigerian equities are: significantly favourable macroeconomic and political backdrop; strong corporate earnings growth; strong portfolio inflows; mergers and acquisition (M&A) activities; and strong moderation of fixed income and treasury yields,” he said.

Bears take over
Although the strong rally recorded in January made the market to close first quarter (Q1) with a growth, sustained bear run in the subsequent months led the market to close the second quarter (Q2) with a decline.

However, the negative sentiments that prevailed in Q2 did not come as a surprise to many operators and analysts. According to them, they had expected profit taking by investors in most stocks that had been overbought in the beginning of year. Also, analysts said the exit of foreign from emerging and frontier markets and political uncertainties in the country fuelled the negative performance.
The foreign investors were said to be moving their funds into Western countries, especially United States, following rate hike. The bear run continued until of the year.

Stakeholders’ assessment
Looking at the performance of the market in 2018, analysts at analysts at CSL Stockbrokers Limited, said the downtrend in the stock market, which was initially triggered by rising yields in the United States(US) due to hike in interest rates by the Fed, was exacerbated by escalating trade war between the US and China, investor fears surrounding a “contagion effect” on the back of the turmoil in emerging markets (Turkey and Argentina in particular).

“In addition, the political uncertainties in the domestic economy in the build up to the 2019 elections amidst a sluggish growth in gross domestic product (GDP) (which slowed from 2.1 per cent in Q4 2017 to 1.95 per cent in Q1 2018 and then to 1.5 per cent in Q2 2018) from the economic recession led foreign investors to flee the equities market in search of high-quality lower-risk assets in developed economies notably the US,” they said.

A stockbroker, Mr. David Adonri of Highcap Securities Limited said the fixed income market predominated in the 2018 due to high interest rate.
Another broker, Mr. Kasimu Garba Kurfi of APT Securities & Funds Limited, said the performance of the stock market in 2018 was poor with a negative of about 18 per cent compared with 42 per cent gained the previous year.

According to him, globally the capital market closed in red, including Dow Jones, NASDAQ, FTSE, Nikkei, JSE among others.
“But our performance was worst. This could be due to election year coming which brings uncertainty in the mind of foreign investors that mostly exit to wait after elections. The issue that related to non-compliance with MTN remittance of dividend and the approach by Central Bank of Nigeria (CBN) not only affected MTN listing but also discouraged foreign investors coming into the country. The results declared by some of the companies such as Lafarge Africa Plc, PZ Cussons Nigeria Plc, and UAC of Nigeria Plc among others, did not help matters,” he said.

Kurfi explained that the introduction of Federal Government of Nigeria Sukuk with high yield encourage investors to diversify from equity into bond.
However, he said the outlook for 2019 look bright in view of low prices of most blue chip stocks.
“Peaceful conduct of the election will boost the performance of the market. The possible listing of MTN will increase the depth of the market. The introduction of Funds 1 which allow Pension Funds Administrators to invest as much as 70 per cent of the funds into the capital market will also impact the market positively,” he said.

Looking ahead, analysts said: “Although, we acknowledge that the broad sell off in the market has led to a significant moderation in the share prices of stocks providing opportunities for bargain hunting, we think that the argument for “Buying the dip” frequently advanced by money managers and traders is still too early to call for.

“With growing concerns about a weakening global economy, the U.S Fed providing guidance for two rate hikes in 2019 and more importantly, the elevated political risk in the domestic economy, we expect foreign investors to remain on the sidelines. Hence, we still expect a choppy theme to characterize the nation’s bourse over the short term.”

Some positive developments
Despite the decline recorded in 2018, the market recorded some positive developments. Apart from the fact some investors still went home with gains of between 101 per cent and 20 per cent, regulators equally introduced some policies that would enhance investors’ stakes in the market going forward.

For instance, the Securities and Exchange Commission (SEC), extended the forbearance period for investors with multiple applications to December 31, 2019. The commission therefore urged investors to regularise their positions, saying no punishment for investors who used multi applications to acquire shares in the past.

According to the Acting Director General of SEC, during the banking and insurance sector consolidation between 2004-2007, there were a lot of issues in the primary market because the banks or insurance companies came to the market to raise funds and because a lot of people were coming to the capital market for the first time, they saw the market as a place where they can make a lot of money so a lot of them bought shares in different names.

“Today those shares are not in the system because if you are unable to identify yourself properly those shares cannot be properly captured in the system. We are saying come and regularize that situation and get back your shares which are being warehoused somewhere. There is absolutely no punishment attached to it, the SEC is not punishing anybody. We just want such individuals to come and regularise that transaction between now and 31st December 2019,” she said.

Also, the NSE introduced some innovations in 2018. For instance, it launched the X-Bot, which is the first African securities exchange Chatbot designed to provide market participants, especially retail investors, convenient, faster and real-time access to data and information from the Exchange.

Commenting on X-Bot, the Chief Executive Officer of NSE, Mr. Oscar Onyema, noted that the introduction of X-Bot is in line with the exchange’s drive to improve market participation through greater access to market information.
“We aim for an exchange that is easily accessible and actively matches investors’ increased thirst for information and detailed disclosure information to make sound investment decisions. With X-Bot, investors in our market can access on-demand market information, news and events on the activities of the Exchange and the various products and instruments that are listed and traded on it.”

The NSE, in collaboration with London Stock Exchange (LSE) hosted the 5th edition of the NSE-LSE Dual Listing Conference.
Themed: “Attracting Global Capital to Drive Nigeria’s Economic Reforms and Sustainable Growth Development,” the conference brought together companies keen to explore a London/Lagos dual listing, corporate finance experts, lawyers, capital market operators, regulators, government officials, media and thought leaders to discuss investment opportunities in Nigeria.

“This event came at a time when Nigeria has turned a corner from its worst recession in over two decades to have the best performing stock exchange in Africa and third best performing globally. I have no doubt that the insightful deliberations at this conference would drive the level of engagement and idea generation that will solidify and strengthen our capital markets partnership and reinforce the drive of Federal, States and Corporates in accessing the deep pool of capital inherent in the Nigerian capital market and on the London Bourse. I encourage us to utilise the opportunities that exist between our exchanges to enhance capacity in our markets and promote diversity of investment products to meet the needs of a wide range of investors and issuers,” Onyema said.

Similarly, last year, the NSE migrated Access Bank Plc, Lafarge Africa Plc, Seplat Petroleum Development Company Plc and United Bank for Africa Plc to its Premium Board.
The Premium Board is the listing segment for the elite group of issuers that meet the exchange’s most stringent corporate governance and listing standards. The board is a platform for showcasing companies who are industry leaders in their sectors. Premium Board features companies that adhere to international best practices on corporate governance and meet the exchange’s highest standards of capitalization and liquidity. The board gives a company access to a global pool of investors who are focused on companies managed in conformity to the highest standards in their target markets.

The NSE said the Access Bank Plc, Lafarge Africa Plc, Seplat Petroleum Development Company Plc and United Bank for Africa Plc have all passed the Corporate Governance Rating System (CGRS).
“This migration affirms the strides our listed companies are making towards meeting the highest standards of corporate governance and underpins the robustness of our market. The new companies have consistently demonstrated their inherent values to be globally competitive brands and we congratulate them on the attainment of this migration,” Onyema said.

Bright outlook

Although the market remained bearish in the first week of 2019, analysts are optimistic that a positive performance should be expected at the end of the year.
Analysts at WSTC Securities Limited said: “The equities market closed in red in 2018, declining by 17.81 per cent. We expect the bearish trend to extend to 2019, on the back of heightened risk in the Nigerian political environment. However, we posit a reverse direction of the market in the second quarter, as we expect political stability to support sentiment.”

In their own outlook, analysts at FSDH Research said although a number of factors may limit the growth of the equity market in 2019, they believe it will record a modest recovery.
“The election activities that will dominate the first quarter of the year may deter investors throughout Q1 2019. However, informed investors usually make money from the equity market when other investors are cautious. Therefore, we expect some strategic positioning in the equity market in Q1 2019 ahead of a recovery in Q2 2019,” they said.