• Sunday, July 21, 2024
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Stock market rally masks Nigeria’s wobbling economy

Nigeria’s stock market

Nigerian stocks are rallying at a time when the economy is gasping for breath. No year better captures the growing divergence between the stock market and the economy than last year.

While the stock market closed with a 50 percent gain last year, the best return since 2007, the economy slipped into its worst recession in 40 years.

But Nigeria’s torrid economic conditions don’t stop there.

The jobs market is in a crisis unlike any other in history. More than 21,000 Nigerians are out of work as entire industries hit the freeze button amid a rampaging pandemic.

Unemployment rate has sky-rocketed to its highest level since the 2008 recession while inflation had quickened to a near three-year high of 15.75% as at December 2020 when the last report was published by the National Bureau of Statistics (NBS).

Per capita GDP has shrunk every year since 2015 with no let-off in sight for weary Nigerians.

Nigeria is tipped by the IMF to grow at the slower pace than sub Saharan Africa peers at a meagre 1.5 percent, which means per capita GDO would contract for a record seventh straight year.

But in the midst of the economic hardship which hasnt spared companies operating in Africa’s largest economy, the stock market is thriving.

Stocks are already up 3 percent this year as domestic institutional investors lead the charge of inflows to the market.

That’s despite foreign investors largely confined to the sidelines amid a crunching dollar shortage.

The stock market and the economy haven’t always moved in tandem but the recent separation between the two has been especially stark, the result is a growing divide between the stock market and the economy.

Some investors warn that the market is too hopeful as businesses and consumers’ face extraordinary uncertainty from the pandemic and social unrest while others are of the opinion that the market is right to keep moving higher as the economy re-opens and policy makers stand ready to provide more economic stimulus.

The reason behind the drop in stock market performance between 2015-2016 (-17.36% and -6.17% respectively), was as a result of the crash in oil prices.

In 2017, the stock market rallied 42% making Nigeria the 3rd best stock market in the world. However, in 2018 the market dropped again as a result of the upcoming elections and the market was experiencing an ‘election sell-off’ (where people don’t like staying invested in a year preceding the elections). With the conclusion of the elections in 2019 and the diverse opinions towards the results, it thus led to the continued downward spiral of the market.

In 2020, the stock market rallied largely because treasury bills had gotten to historical lows and big corporations did not have any other investment option but to choose stock that presented excellent dividend yields. The market close price as at December 31, 2020 was at 40,270.72 thus boosting stock market performance by 50.03% higher than the markets performance in 2017 (42%) and leaving average stock market annual return at 6.07 percent.

There is a saying among investors that ‘the stock market isn’t the economy’. The stock market offers a window into the economy by tracking publicly traded companies, but many Nigerians work for companies that aren’t public and they spend money on goods and services that aren’t directly reflected in the stock market. Also, the stock market tries to predict what would happen in the future while economic data reflects what has happened in the past.

The stock market is a bit of a leading indicator because investors are looking forward in doing a forecast and the stock market is the collective forecast of all those investors. It is not reflective of how the economy is doing today but how the economy and businesses are going to be doing 3-9 months from now. When the stock market goes down, more investors’ are selling stocks than buying them; that means collectively traders’ are less optimistic about the future prospects of companies earnings and the overall economy.

The forward looking nature of the stock market is one reason why stocks have surged in recent months even as the economy has collapsed. While unemployment spiked recently, some investors expect employment would bounce back later this year as the economy gradually re-opens. Many traders are pinning their hopes on positive developments of the COVID-19 vaccine which would speed up the economic recovery. Analysts argue that health care news right now is more important than economic data and ratings and the major reason behind that is the fact that the pandemic would officially end when the entire global populace feel comfortable enough to go out and continue global commercial activities without skepticism.

Historically, the stock market benefits from signs that the economy would improve hence, bad news for the economy could translate into good news for individual stocks.

The share price of UBER for example surged 9% in one day in May 2020 after the company announced lay-offs and cost cuts, thus when wages are low, profits become high and the stock market loves high profits and low wages but the economy does not like low wages.

Many stock investors have also been encouraged by aggressive stimulus from the CBN and MPC. With interest rates and bond yield set to remain low for a long time, investors’ have no choice but to put their money into stocks. Low interest rates lead to high stock prices, people don’t want to put their money into bonds, they want to put their money into the stocks.

Another explanation for why stocks have surged despite the country’s economic struggles requires a close look at the tech company shares in the stock market. Tech company stocks have really benefited from work from home orders. The share price of zoom spiked in the first 3 months of the pandemic lock-down as investors anticipated huge investments in the stock.

By some account, the gaps between the stock market (NSE) and the economy now looks wider than ever. Many retail investors have kept their cash on the side-lines as they try to wait out this economic crisis; meaning they have not benefited from the recent bounce-back in markets.

In the long-term, the stock market and the economy generally have moved in the same direction as they are both affected by factors like corporate earnings, productivity and changes in demographics; the question however is, whether the current disconnect is the start of a longer lasting trend?