The Nigerian Stock Exchange (NSE) All Share Index as at market close on March 31 recorded its single biggest monthly decline in five years as the bourse shed about 4,915 points in the month, outpacing the selloffs experienced during the economic recession in 2016.
The biggest monthly decline on record remains October 2008 when the NSE shed up to 9,890.27 points in the aftermath of a global financial meltdown coupled with a sharp decline in global oil demand, leading oil prices to collapse from a record $144.28 in July 2008 to $33.87 in December 2008. The massive oil price decline of 76.5 percent brought about the second biggest decline of the NSE-ASI by 9,637.02 point in January 2009.
Meanwhile, since then the Nigerian stock market has crashed every time oil prices plummeted at an alarming rate. The stock market shed 5,098.08 points in January 2015 as oil prices tumbled again from $115 in June 2014 to $49 in January 2015. The NSE Index dropped by around 12,920.41 points during the same period.
The index performance in March slightly outpaced the selloffs recorded in January 2016 when oil prices fell below $30 for the first time in several years. The NSE-ASI dipped by 4,726.10 points in January 2016, about 200 points less than was recorded in March 2020, making it the fifth worst month on record in the local bourse.
However, the crash in oil prices from $73 in April 2019 to $26 in March 2020 is not the only factor responsible for the current selloffs on the NSE. The global outbreak of the coronavirus is also at the heart of these selloffs as the Nigerian economy comes under pressure due to the effect of full lockdowns in Nigeria’s biggest city economies, including Lagos where the local bourse is situated.
The selloff is driven both by local and foreign investors exiting the stock market to buy dollars largely as a hedge against potential losses arising from uncertainties caused by declining oil prices and a COVID-19 outbreak. These huge outflows especially by foreign investors put the naira under pressure, causing a devaluation to N380 at the I&E window.
Meanwhile, the stock market is often a good predictor of future economic events. Analysts are now speculating that the market could be pricing in an economic recession in a few months going by the extent of losses on the exchange in Q1 2020. If it does happen, it will be Nigeria’s second recession in four years triggered by the cyclicality of crude oil prices.
This time, the recession may be deeper and longer considering it is caused by a combination of a global health pandemic, a global economic slowdown and an oil price crash.
IFEANYI JOHN
