Daily Insight: Oil & Nigerian Market Performance – Is this divergence sustainable?

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The lingering conception about oil-exporting economies is that they are proxy plays on commodities; if commodity prices go up, so will their respective equities. In 2014-2015, Nigerian assets were hit hard by the crash in oil prices, while also co-moving with the commodity during the 2000s oil boom.

So far this year, Nigerian equity and oil performance have diverged. This divergence reflects “unsuitable” US dollar and interest rates which have hampered global appetite for risk, not to mention rising political uncertainties in the wake of the 2019 Presidential election. We ask; “Is this year’s performance an aberration that will sooner or later revert to mean – rising back in line with reviving commodities prices?”

In answering, it is worth mentioning that Nigeria is in a state of fragile stability; what we are experiencing now is not just a cyclical problem but the culmination of many structural challenges. Having come through the worst, the structure and basic dynamics of the country that brought us into a recession in 2016, has still not changed. Therefore, despite the rally in oil prices, the slow implementation of badly-needed structural reforms that can overhaul the economy would continue to deter investments. That being said, the positive sentiment that often trails improving oil fundamentals may be sufficient to lift naira assets from their current lows.

 

UNITED CAPITAL

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