Biggest one-day drop in NSE raises bear market concern

Fund managers and investors are wondering if the biggest one day drop in Nigerian equities is the start of a bear market, or just a healthy correction after the huge run up in share prices year to date.

The equities market created a historical record last Thursday as Nigeria’s All-Share Index (NSEASI) declined by 3.88 percent on speculation that foreign investors exited the world’s fifth-best

performing exchange this year, on concerns that global stimulus measures may ease.

“Ex-Dangote Cement {DANGCEM} the market return would have dipped by 5.32 percent. Neither of which has been recorded in the last six years, even during the peak of economic recession in 2008,” said Meristem securities analysts in an equities market update.

A bear market is a general decline in stock prices of 20 percent from its most recent highs, while a stock market correction, or pullback, is when the stock market declines 10 percent or less in a relatively short period of time.

While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do.

“I think this is a correction, but history warns us that after one of the great crashes (1929, 1973, 2007) there is often another big challenge some eight years later (1937, 1980-82, 2015?),” Charles Robertson, Global chief economist at Renaissance Capital, said in an email response to questions.

“This may come from Fed tightening or problems in the Eurozone. But for now, we assume this is a modest correction and that investors are likely to gently return to the markets in emerging and frontier that have sold off.”Frontier markets such as Nigeria

had until last week been proving resilient to the three-week old selloff that had erased $1.9 trillion of global equity value.

The gauge has gained 37 percent this year, boosted by a 55.4 percent gain in DANGCEM. Nigeria’s economy, which expanded by 6.3 percent last year, is forecast to grow 7.2 percent in 2013, according to the IMF.

However as offshore investors exited the domestic bond market earlier this week, on fears that the Federal Reserves loose money policy is nearing an end, stock market investors seem to have taken a cue and followed suit.

The foreign portfolio inflow in the system is equivalent to 25 percent of current dollar reserves of $48.4 billion, and about 10 percent of that is in fixed income and 90 percent in equity, meaning that offshore money in equities is a sizable $10.89 billion or 14.52 percent of Nigeria’s stock market, valued at $75 billion as at last Wednesday, before the sell off.

The naira, which strengthened 3.9 percent against the dollar last year and was the continent’s best performer, has retreated 1.8 percent this year to N159 per dollar. A drop in the naira erodes the capital gains of foreign investors.

“The key question is whether the NSE can continue to trend higher,” Samir Gadio, an emerging markets strategist at Standard Bank, London said.

“Add to this rising fixed income yields in Nigeria and the upwards pressure on USD/NGN, and one may start thinking that the rally in Nigerian equities is becoming over-extended.”

Nigerian bond yields have been rising as the emerging markets fixed income carry trade unwinds.

The yield on Nigeria’s benchmark ten-year government bond due January 2022 last week rose to their highest since the October addition of Nigerian bonds to JPMorgan’s emerging market bond index.

The yield on the 2022 securities has risen from a low of 11.68 percent in January to 13.90 percent last Thursday, according to data from the Financial Markets Dealers Association, FMDA website.

Foreign investors accounted for 43 percent of trade on the NSE in March and 61 percent in all of 2012, while net foreign inflows into Nigerian equities amounted to N29.3 billion($182 million) in March, compared with N93.8 billion in 2012,according to data from the bourse.