Falling Equity Market and the 2019 General Election: Where Lies the Hope?

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After emerging the third-best performing stock market in the world and the best in Africa, appreciating 42.30% in 2017; the Nigerian equity market posted a dismal performance in the just concluded the year 2018, shedding 17.81% to close the year with a market capitalization of ₦11.72 trillion.

While many will see the 2018 performance as Nigeria’s fair share of the global tension which rattled major markets across the world such as the NYSE (which lost 11.43%) in the U.S; Shanghai Composite Index (which lost 24.08%) in China; FTSE 100 (which lost 0.39%) in the UK; Nikkei (which lost 13.17%) in Japan; CAC (which lost 11.28%) in France and DAX (which lost 19.60%) in Germany, a closer analysis of the intensity of the dip in performance of the Nigerian market and the timing of its commencement with respect to happenings in the domestic economy shows that the dismal performance was also impacted by the heated political environment ahead of the general election in February 2019.

Historical pre-election year performance of the Nigeria equity market

Since returning to a democratic dispensation in 1999, the Nigeria equity market has never had it so rough in a pre-election year as that of 2018 in which the market posted a year-to-date loss of 17.81%. In monetary terms, this loss amounts to ₦1.89 trillion as at the last trading day of 2018.

With the exception of the year 2014 when the All Share Index (ASI) recorded an annual decline of 16.14%, the previous preelection years were characterized by positive gains in the equity market as happenings in the political environment did not dampen investors’ confidence significantly as in recent ones.

The Nigeria equity market All-Share Index data obtained from the CBN statistical bulletin of 2010 shows that the Nigeria stock market closed the pre-election years of 2002; 2006 and 2010 with gains of 10.71%; 37.80% and 18.93% respectively. However, in 2014, the crash in the global crude oil prices and the heated political environment leading to the general election in 2015 reinforced each other to drag the equity market performance for the year down by 16.14% as shown in figure 1.

What are the similarities between 2014 and 2018?

The year 2014 and 2018 in the history of Nigeria share a similarity of being pre-election years, with both characterized by falling crude oil prices in the latter part of the year. In 2014, the global crude oil prices suffered a massive decline from an average cost per barrel of $110 in June to below $67 in December. Similar trend also occurred in 2018 when crude oil prices collapsed from a peak of $86 in October to below $55 at the end of December.

This suggests that some correlation exists between the performance of the Nigeria equity market and changes in global crude oil prices.

However, while the decline in the equity market performance in 2014 came after the collapse of crude oil prices in Q2’14; that of 2018 began as early as May while crude oil prices collapsed in November. According to the NSE monthly foreign portfolio investment report, the size of foreign investment inflows which was in excess of outflows in the first four months of the year turned negative in May 2018, as outflows outstripped inflows by ₦68.83 billion and the trend continued thereafter.

What are the differences between 2014 and 2018?

While the equity market performance of 2014 was mainly shaped by the crash in global crude oil prices and the political environment in Nigeria; other external factors also reinforced the two known driving forces in 2018. Notable among these were the interest rate hike in the U.S. and other advanced economies and the spillover effect of the U.S. – China trade war.

New changes and possible market performance scenarios for 2019

The recent improvement in the global crude oil prices since the turn of the New Year 2019 and the advancement in the U.S. – China trade talks point to a potential easing of external pressures on the Nigerian equity market, which we believe will in the near term improve foreign investment inflows and aid market stability. However, we believe the timing and the robustness of the expected improvement in the equity market performance depend on the post-election events and the policy actions of the winner of the presidential election thereafter.

For instance, in all the four previous elections years since returning to a democratic dispensation in 1999 (that is, 2003; 2007; 2011 and 2015), the equity market performance has always rebounded in the second quarter (Q2) after the election had taken place (either March or April). This is shown in figure 2, and it suggests that investors (foreign and domestic) prioritize stable political environment above the personality or the ruling party in making the investment decision.

On the flip side, in 2015 when the new administration failed to set up its cabinet and formulate a policy direction for more than 3-months, the market responded and foreign investment outflows caused the market to dip by 6.69% and 8.25% respectively in Q3 and Q4.

Going forward, in the absence of any strong external shock, we believe the equity market’s recovery will gain momentum by Q2 2019 irrespective of who emerges winner of next month’s presidential election so long as there are no post-election uprisings.

When should investors take position?
There is no gainsaying the fact that many stocks on the Nigerian equity market are currently largely underpriced. However, while we’ll recommend that investors should limit their stocks choices (for now) to those with strong valuations such as Zenith, Guaranty, UBA, Flourmills, FBNH, Transcorp, Seplat and Dangcem; we believe taking the position now for a medium-to-long term gain is not a misplaced priority. According to the word of the American business magnate, Warren Buffett, “Get greedy when others are fearful and be fearful when others are greedy.”

 

GTI RESEARCH

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