Stock market as economic barometer
It is no longer a newsflash that the challenges faced in Nigeria cut across all sectors of her economy and analysts have reiterated the need for “bold” reforms in the oil and gas, and power sectors to spur growth above current snail-paced growth of 2 percent on the average.
However, these reforms are looking more like rocket science with still no clear direction. Unorthodox fiscal and monetary policies, which should be the exception, don’t boost investors’ sentiment. Foreign investment in the equity market has declined faster compared to other asset classes, according to data from the National Bureau of Statistics (NBS). Investors are being cautious as signs to boost confidence are missing. Domestic investors who are now more risk averse and yet to recover from 2008 market crash are also holding back.
Consequently, the bearish trend in the equity market since 2018 continued into 2019; the All Share Index (ASI) a measure of stock market performance plunged -14.47 percent as at 26th November 2019. The amended NSE pricing methodology has kept prices somewhat stable and prevented faster deterioration of the market performance. Still the future remains bleak.
To put in the right context, economic performance mirrors businesses performance. Consumer goods firms are facing revenue strains as consumers’ wallets shrink resulting in negative stock performances; impressive results from other companies have had little or no impact in boosting general market sentiment.
Conventional economics states that stock market meltdowns are typically accompanied by a financial crisis and an economic recession. However, economic cycles don’t always mirror stock market cycles frequently enough to make it a norm. In fact, many economies have grown before and after a stock market price bust. For example, Nigeria’s economy grew by 7 percent in 2007 and again in 2008 while the All Share Index fell over 40 percent between December, 2007 and December, 2008.
However, a poorly performing stock market means investors are losing value – hence we cannot fold our arms and watch the market gradually lose relevance as investors abandon in search for safer haven.
The recent US fed rate cut for the third consecutive time which has opened up opportunities for carry trade and foreign interest in high yielding emerging and frontier market may not be beneficial to the Nigeria equity market as foreign investors look beyond companies’ numbers when making investment decisions.
Unfortunately, the federal government is indifferent to how its statist policies and disdain for private capital affect the equity market.
The recent capital importation report released by the NBS clearly reveals how the Nigerian equity market is capital starved. Quarter on quarter, foreign portfolio investment in the equity space slumped 27.91 percent to $358.19 million – lowest in the year – in the third quarter of 2019. However, this is not the case in other frontier market peers.
The Kenyan economy for example has shown the effect of good reforms on stock market performances as its 20 biggest companies went from $6 million worth of trades since January 2019 to $13 million in the last month after the removal of a controversial cap on interest rates first introduced in 2016 by the government to force bank lending.
The performance of the stock market is determined by the well-being of listed private companies which are largely affected by cycles in the economy. The equation is simple, introduce smart and bold reforms and the economy improves in the medium to long term; companies benefit, the confidence of investors is restored and ultimately stock price begins to reflect true worth based on fundamental.