How Political Climate, Naira Devaluation, Others Crashed Stock Market

How Political Climate, Naira Devaluation, Others Crashed Stock Market

Patrick Aigbokhan
The recent downturn in the capital market has been traced to a couple of factors, which led to a total loss of N3tn in value of stocks listed on the Nigerian Stock Exchange (NSE) in 12 months.
Similarly, investors lost N160 billion between Monday and Thursday last week, which was as a result of the N3tn loss in market capitalisation.
Report had revealed that total value of stocks listed on the Nigerian Stock Exchange (NSE) fell by N3.255 trillion in twelve months, from September 30 2014 to October 8, 2015, resulting to another loss of lose of N160 billion by investors just last week.
Market capitalisation had on September 30, 2014, fallen by 23.9 per cent from 13.61 trillion to N10.26 trillion at the end of trading on Thursday, October 8, 2015.
The All Share Index (ASI), which is another stock market indicator, reportedly dropped by 26.9 per cent from 41,210.10 basis points to 30123.20 points.
On Friday October 2, market capitalisation fell from N10.512 trillion to N10.352 trillion at the end of Trading on Thursday, October 8.
Findings have however revealed that factors influencing the downward trend of the market are not far fetched. They include and not limited to the uncertain political climate before the elections, sharp decline in crude oil prices, devaluation of the naira, expectation of further devaluation of the naira, absence of clear economic direction or policy of the present administration reflected in the late appointment of ministers, exclusion of Nigerian from the J.P Morgan Bond Index and restrictive monetary policy of the Central Bank of Nigeria (CBN).
For example, after the September 8, 2015, announcement by JP Morgan of its decision to phase out Nigeria from its Government Bond Index, Emerging Market, GBI-EM, by ending of October, market indices showed steady recovery from several days of decline from N10.148 trillion to N10.425 trillion in two weeks. The market added N42 billion.
Prior to the October deadline for the removal of Nigeria’s bond from the J P Morgan index, the market began to experience decline, leaving investors with a loss of over N160 billion in four days’ trading .
In a recent report, Mr. Gregory Kronsten , Associate Director Head, Macroeconomic & Fixed Income Research, FBN Capital, noted that if Nigeria is removed from the JP Morgan Index, many foreign investors will be forced to sell off their Nigerian bond holdings, which is estimated at about $2 billion.
Kronsten pointed that there are foreign portfolio investors who knew little about investing in Nigeria but decided to invest because it is listed on the JP Morgan’s GBI-EM index.
“Delisting Nigeria would also mean that bond yields and borrowing costs will increase, negatively affecting Nigeria’s dire economy. The Naira may also face another round of major devaluation, as the economy could struggle to sustain the pace of forex outflows outside Nigeria,” the FBN analyst said in the report.
The performance in the stock market is said to be influenced by the current state of political, economic and financial situations in the country.
WSTC Financial Services Limited, a Lagos-based investment house, had said in its reaction to the announcement by J.P Morgan, that both warranted and unwarranted reactions should be expected from investors in the equities market.
The firm said in a report, “We believe the sell-off in equities will be triggered by both panic reaction to the announcement, as well as more fundamental concerns which will be anchored upon elevated required return on equity, attractive returns in the fixed income market and uncertainty regarding the value of the Naira.
“We reckon that the rout in the equities market will create attractive entry opportunities for value investors and the ability to take advantage of these will depend on individual investor’s ability to filter the rhythm from the noise.
“However, it is important to state that the fundamental concerns further depress our short term outlook on the performance of the equities market, reinforcing our recommendation for flight for safety through asset re-allocation into fixed income and currency-hedged assets.”
Another Lagos-based investment house, Afrinvest Group, also stated in its analysis that was reported earlier that while a knee-jerk reaction is observed in the Nigerian capital market since the announcement, it is expected to stabilize in the medium to long term as Nigeria awaits policy direction from the Buhari’s administration.
“The financial market sentiment feels the impact of this news flow as the domestic investor sentiments will seem to be the new major force driving the fixed income market, while the equities market may still continue to enjoy a mix of foreign and domestic sentiments as Nigerian equities still remains in the Morgan Stanley Capital Index for frontier markets,” Afrinvest stated.