The outlook in a nutshell
If the elections go well (and by well I mean, a successful and peaceful handover on May 29th, regardless of who comes in to power), it will reflect positively in the market somewhere in the second or third quarter this year. If whoever comes in can put in place policies that tackle our biggest issues, for example fuel subsidies and electricity tariffs, and if there is some traction, that is some positive, sustained movement in the right direction, then the market will do a lot better.
If the incumbent wins, the stock market will do well because of political stability. I also suspect the incumbent will be forced to move on some issues that he has not moved on, such as fuel subsidies and electricity tariffs, among others. He may, to a large extent, start the process of eliminating subsidies, and addressing electricity tariffs so that the power sector can takeoff. He may also begin to look more aggressively at the issues around our ports. We could begin to see creative solutions to the bottleneck in Apapa. All this grounds my optimism. Provided of course that the oil price stays at a decent $50-$70 range or higher, the market will do well this year.
The big movers
For most of the “big movers” (Dangote Cement, Guaranty Trust Bank, Access Bank, etc), it should be positive year, again, if we have smooth elections and the government can go about the business of infrastructure spend. In the last three years, the government didn’t have the money, the little they had was used to pay salaries. I anticipate they will focus more on infrastructure in the coming years. We know of several projects in the works like the second Niger Bridge, the Lagos-Ibadan rail, Lagos-Ibadan express, and a few others. Of course, much of the money will come from continued borrowing.
Currently, Nigeria’s reserves are $US 43billion, I’m also assuming that the incumbent wins, he will want to leave a legacy behind. To do this he is likely to run down the reserves. For example, he could take five billion dollars to put in infrastructure for a few signature projects. Some might argue that there is no point in having $43 billion in reserve when your people are suffering, there’s no employment, etc. “Why not see what you can do to alleviate those problems?” People might say. Because part of what is suring up the reserves are the Eurobond borrowings, the current administration if re-elected, is likely to spend that money and leave someone else to worry about the consequences later on.
Urgent reforms
Fuel Subsidies and Electricity tariffs come to mind immediately when thinking about urgent reforms, and these are very difficult things to do. Perhaps even more utopian is the need to cut down the cost of governance. We also need to sell some of the assets that are wasting to help raise cash. If you have assets that are non performing, sell them! We are already doing some good work in the agricultural sector and we need to continue. Lastly, let’s have a rate convergence. At N305/1USD, the Central bank converts for states and “special projects”. The system is opaque. People buy at N305 and sell at N360. A convergence may lead to an initial devaluation but it will settle down. We will be able to raise more money, pay salaries, and do more infrastructure projects. A convergence will give confidence to foreign investors.
What’s happening in the United States
It’s unlikely that the Federal Reserve will stick to its initial plan to hike rates three times this year because of concerns about domestic and global growth. Clearly this may slow down inflows to Nigeria. The funds that are Africa or emerging markets focused will have no choice but to come here. If our economic fundamentals and policies are improving then they will come. This year you will also see a renewed interest from PFAs, in other words local investors will start taking positions. So hopefully that kind of activity will help pick up some of the slack.
Taking stock positions
This is the time to take positions in the market. The market can still go down and it can also go up, but this is the time. That said, if you want to buy 1 million shares of Guaranty Trust Bank, buy it over time. Don’t buy it all at once. Some of the stocks that I’m positive about are Guaranty Trust Bank, Zenith Bank, United Bank for Africa, Access Bank, First Bank Holdings of Nigeria, Dangote Cement, Cement Company of Northern Nigeria, Nigerian Breweries, Guinness, and Nestlé. I think there’ll be some positive movement on these stocks this year.
Higo Aigboje
Aigboje spoke to BusinessDay about his outlook for the stock market and what to expect from the “big movers” post election.
Next on Wednesday
Dr. Nonso Obikili, Chief Economist at BusinessDay writes on The Fiscal Challenge.
