Investors cautious as economy concerns batter stocks by N1.2trn

Long term stock buyers now appear to be more cautious of Nigerian equities future as the market remains battered, signaling potent risks to returns.

The setback to Nigerian stocks prospects further reflects on a widening gulf of approximately N1.2trillion lost so far at the local bourse, following investors growing concerns about Nigeria’s growth.

Africa’s biggest economy by GDP size, currently faces an unexciting foreign direct investment (FDI) story as the price of its major export products –oil continues to decline, downwardly impacting budget financing and foreign reserves.

Also, most companies halfyear (H1) results released at the Nigerian bourse show the negative impact of the insecurity in the northeast of the country on earnings position. This is aside other negatives which have made stock investors to reclassify their portfolio away from stocks –such as lowered disposable incomes of Nigerians and declining naira exchange rate against the dollar.

“Equities markets starved-off system liquidity as fixed income securities became the preferred investment instruments of investors,” said market analysts at Financial Derivatives Company.

The Nigerian Stock Exchange (NSE) benchmark performance indicator –All Share Index (ASI) has retreated from year-open highs of 33,943.29 points as at January 5 this year, to 29,214.13 points as recorded Monday August 24, 2015.

Also, the value of listed Nigerian equities declined from record highs of N11.237 trillion as at January 5, this year, to N10.013 trillion as at yesterday, indicating a value loss of about N1.224 trillion.

“In the absence of any positive news flow to trigger a market rebound, we still expect speculative play to dominate equity positioning”, said the Kayode Tinuoye led team of research analysts at Lagosbased United Capital plc.

The analysts said they “look to see a sustained weak sentiment in the banking space as recent events continue to hint at poor near term outlook for the banks.

For the non-financials, especially the consumer names, volatile FX and weak consumer demand will continue to pressure earnings in the medium term.

“Technical readings on the benchmark (NSEASI) suggest that careful momentum trading may still offer modest short term rewards, while current rock bottom valuations remain attractive for longer term positioning”, United Capital analysts added.

China’s recent move to end the Yuan’s de facto peg with the dollar and the potential for a new currency war is the latest catalyst for declines in emerging-market currencies, including the naira.

Worries about China’s recent decision to devalue the yuan intensified investor concerns that weakness in the world’s second-largest economy will crimp global growth.

Nigeria is exposed to China in terms of oil exports (as the U.S market dries up), and more recently, the seven percent of foreign currency (FX) reserves Nigeria has denominated in Yuan.

“We still expect plenty of devaluations to come among commodity exporters in frontier markets this year. We are still looking for devaluations – a good 15% in Nigeria, at least 10% in Kazakhstan but more like 33% is our base case, nearly 10% in Kenya, nearly 20% in Ghana” said Charlie Robertson, global chief economist, at Moscow-based Renaissance Capital.

The market is waiting impatiently for ministerial appointments (next month) and policies direction of President Muhammadu Buhari, barely three months after the APC (All Progressives Congress political party) assumed power with a good deal of goodwill with the population and investors.

The plunge in oil prices accelerated Monday, in line with the selloff in global financial markets, as investors were shaken by the tumult in Chinese equity markets and worries about global economic growth.

Crude oil price tumbled further on China market turmoil. Brent for October settlement declined as much as $2.18 to $43.28 a barrel on the London-based ICE Futures Europe exchange and was at $43.65 at 1:23 p.m yesterday. The contract lost $1.16 compared with $45.46 on Friday.

West Texas Intermediate (WTI) for October delivery decreased as much as $1.86, or 4.6 percent, to $38.59 a barrel on the New York Mercantile Exchange, the lowest price since February 2009. Prices fell 4.8 percent through Friday for an eighth weekly drop, the longest retreat since 1986.