Nigerian stocks are down some 4 percent since President Muhammadu Buhari’s re-election in February as investors struggle to find positive triggers to swoop for stocks at a time when the allure of double-digit yielding fixed income government securities has proved difficult to resist.
Although the bearish stock market mirrors a global shift from risk assets to safe-havens, analysts say Nigeria has contributed to the stock downturn with its policy inaction at a crucial time when peer countries are implementing the type of reforms capable of sending positive signals to investors.
Egypt is talking up energy and investment reforms while Kenya is in the middle of repealing a regulation that caps bank lending. Those reforms mean both markets have done better than the Nigerian stock market this year.
Back home in Nigeria, President Buhari is pushing for reforms in the oil and gas sector from the gas commercialisation programme which will put an end to gas flaring, even as Production Sharing Contracts (PSC) with International Oil and Gas companies are being reviewed.
Both reforms have the potential to attract private investments and create fresh revenue sources for the cash-strapped nation.
But investors have not been impressed. Critics say the big ticket reforms that need to happen to boost economic growth are still stalling, whether it is the need to ditch expensive fuel subsidies or pass the Petroleum Industry Bill.
“Nigeria is best summed up by investors as a country with a developed market growth rate but emerging market risk, so it is not exciting enough for stock investors. Instead, they are piling into fixed income where they are taking much less risk,” said Wale Okunrinboye, head of research at Lagos-based pension fund manager, Sigma Pensions.
“Buhari has not done much to change that story. He hasn’t convinced investors enough that the economy will fare better in his second term,” Okunrinboye added.
Lagos has been the weakest performer year to date of the three biggest stock markets including Nairobi and Johannesburg.
Jo’burg, being the most developed and liquid of the three markets, appears to have benefitted the most from the signals that the normalisation of US monetary policy has slowed, if not stalled.
Nigeria hasn’t shared in that rally. Data from the Nigerian Stock Exchange put the foreign investor share of turnover in February at 53 percent but show that their trading over the month amounted to a net outflow of N11 billion.
The stock market has rallied in the month after every election since Africa’s biggest oil producer ended military rule 20 years ago, until now. It also marks a departure from Buhari’s first tenure in 2015 when the stock market rallied more than 10 percent.
“Many equity investors may have hoped for an Atiku victory on the grounds that his campaign stressed his private-sector credentials and insisted that he would somehow get things done,” said Gregory Kronsten, head of fixed income research at FBN Quest.
“In stark contrast, fixed-income players responded very positively with a surge in buying,” Kronsten added.
The question on the mind of some analysts is what would act as a trigger for sizeable new flows into the Lagos market, and thereby counter the removal of the minimum equity holding for PFAs as well as a generally uninspiring set of first quarter 2019 results, with exception to some of the banks.
There are expectations that an oil price at a higher and sustainable level may as well be the much-needed trigger for the market, as indicated by the well-known linkages between the price and the non-oil economy, which was demonstrated by the healthy GDP growth posted in 2010- 2014.
Another possible trigger, according to FBN Quest, is evidence that the banks are achieving the loan book growth of around 10 percent for the year, which has been their guidance.
That currently looks unlikely, with most banks cutting their loan books in an economy still recovering from a contraction in 2016 and remains fraught with risks.
Surprises on the upside in the Federal Government’s reform agenda, and sizeable new listings such as MTN Nigeria, could also be the trigger.
Hopes for reforms took a blow after the Central Bank of Nigeria (CBN) unexpectedly cut its monetary policy rate (MPR) by 50 basis points (bps) to 13.5 percent from 14 percent, Tuesday, citing the need to boost growth.
The move by the CBN to cut rates at this time creates more questions than it answers, according to Razia Khan, Africa chief economist at Standard Chartered.
“While FX stability has benefitted both from rising oil prices and rising portfolio inflows into Nigeria, the cut today raises important questions about the government’s broader reform intent,” Khan said, pointing to two concerns.
First, the MPR cut comes following Senate approval of a sizeable minimum wage increase. Second, it remains to be seen what the move suggests about the likelihood of an imminent VAT hike or fuel price deregulation, according to Khan.
“Both are pressing, much-needed reforms – but the CBN’s rate cut today appears to suggest that these reforms, which may both exert upward pressure on the price level in the short term, may not necessarily be imminent. This would be disappointing, especially for investors hoping for stronger reform impetus post-election,” Khan said.
LOLADE AKINMURELE
