No doubt, monetary policy will continue to play a vital role in determining Nigeria’s capital market activity in 2017; but leaders of market community will have to do a better job at promoting its unique value proposition to both global and domestic investors.
For instance, in addition to sluggish performance in secondary markets at the Nigerian Stock Exchange (NSE) in 2016, the primary market activity was nonexistent as there were no Initial Public Offerings (IPOs). Although, only one new company listed by introduction in the review period.
Disappointingly, in 2016, the NSE witnessed the lowest levels of foreign portfolio and domestic trading activity post the global financial crisis, with a year-on-year (yoy) decline of 69.79 percent and 56.79 percent, respectively.
The NSE Industrial Index recorded the steepest drop in the year 2016 at 26.37percent. In the Exchange Traded Funds (ETFs) market, the Vetiva Industrial ETF recorded the largest price decline in 2016 of 20.51 percent when compared to ETFs in other sectors.
The NSE Industrial Index, designed to provide an investable benchmark to capture the performance of the Industrial Sector opened year 2016 at 2,166.70 points and closed at 1,595.33 points.
Investment analysts said the record decline in the NSE Industrial Index was a result of severe difficulties faced by companies that make up the Index. Some of such difficulties related to accessing foreign exchange for imported raw materials with negative effect on the pricing of their shares.
Ten industrial companies that make up this Index are: Berger Paints Plc, Beta Glass Nigeria Plc, Chemical and Allied Products Plc, Cement Company of Northern Nigeria, Cutix Plc, Meyer Plc, Lafarge Africa Plc, Paints and Coatings Manufacturers Plc; Portland Paints and Products Nigeria Plc, and Dangote Cement Plc.
“Capital markets tend to act as barometers of any economy, and in Nigeria’s case, the prolonged economic downturn directly impacted an array of products and asset classes on the Nigerian Stock Exchange (NSE)”, said Oscar Onyema, Chief Executive Officer, Nigerian Stock Exchange.
Looking at the NSE index performance for 2016 shows that NSE All Share Index which opened 2016 at 28,642.25 points closed at 26,874.62 points, down by -6.17 percent.
After peaking at 31,071.25 in June 2016, an increase of 8.48 percent over the 2015 closing value, the NSE All Share Index (NSE ASI) began to retreat to negative territory as total foreign inflow dropped 45 percent between June (N42.46billion) and July (N23.43billion) due to loss of confidence in the implementation of an announced free floating foreign exchange regime; weak corporate performance; and second consecutive quarter of negative economic growth in the period resulting in the economy entering into a recession.
Analysts believe that decisive policy response is vital for market recovery in 2017. “Despite attractive valuations, the reversal of fortunes for the equities market in 2017 will depend on a decisive policy response to the country’s fiscal and currency crisis. Given current depressed prices, dividend yield looks attractive; hence the equity market may see some respite in first-quarter (Q1) end/early second-quarter (Q2) as local participants position ahead of full year (FY) 2016 dividends. The CBN’s tightening stance, coupled with increased government borrowing is likely to keep yields high in 2017”, said research analysts at Lagos-based investment firm, CardinalStone Partners Limited.
The NSE 30 Index also declined by -7.18 percent, from 1,287.67 points to 1,195.20 points; NSE Premium Index increased by 6.98 percent, from 1,584.92 points to 1,695.51 points; NSE Main-Board Index declined from 1,337.85 points to 1,203.79 points, down by -10.02percent; while NSE ASeM Index was down by -1.57percent, from 1,208.65 points to 1,189.69 points.
Meanwhile, increased buy last year seen in the shares of value banking stocks spurred the NSE Banking Index to increase from 268.49 points to 274.32 points, up 2.17percent. The NSE Pension Index declined from year open level of 815.16 points to 810.04points, -0.63 percent lower.
The NSE Consumer Goods Index was down by -4.49percent, from 746.19 points to 712.65 points; NSE Lotus Islamic Index declined from 1,998.85 points to 1,841.59 points, -7.87 percent lower; NSE Insurance Index was down from 2016 open level of 142.61points to 126.29 points, a decline of-11.44 percent; while NSE Oil/Gas Index dipped by -12.31 percent, from 356.56 points to 312.68 points.
On the flip side, the NSE’s NewGold ETF saw a sharp increase, as its value climbed 94.73 percent in 2016, a clear indication of investor’s flight to safety sentiments.
Generally, the Nigerian Stock Exchange saw 19.41 percent increase in ETF Asset Under Management (AUM) listed on the Exchange from 2015 to 2016, primarily due to the listing of the Vetiva S&P Nigerian Sovereign Bond ETF.
In 2016, the bottoming out of crude oil prices and a drastic decline in domestic oil output curtailed crude oil export proceeds, which accounts for roughly 90 percent and 70 percent of Nigeria’s FX earnings and government revenue, respectively.
This resulted in foreign exchange liquidity challenges during the year, as the supply side of FX into the Central Bank of Nigeria (CBN) dropped by over 70%4, despite heavy domestic demand. Accordingly, the oil price shocks and associated prolonged FX dilemma, coupled with challenges to policy implementation, drove the Nigerian economy into its first recession in over twenty (20) years by Q2’16.
“Further indication of the equity market’s link to economic dynamics is reflected in the drop in NSE Oil/Gas Index which declined 12.31percent, mimicking the 22.01percent decline in real GDP growth of the oil sector by Q3’16 driven by output and distribution complications”, Onyema said recently at 2016 market recap and outlook for 2017.
Real Estate Investment Trusts (REITs) declined by 49.48 percent and 47.10 percent in value and volume traded, respectively, “reflecting the macro-economic impact of the real estate sector which declined by 7.37 percent in terms of GDP”.
Both domestic and foreign investors in the capital market sought for stability in Nigeria’s monetary policy.
However, the Nigerian capital market did experience some resilience by year-end as the NSE Premium Board Index ended 2016 in positive territory, advancing 6.98percent, while the NSE Banking Index inched up by 2.17percent.
Furthermore, after declining by 21.60 percent to a low of 22,456.32 points in Q1’16, the NSE ASI rebounded by 19.68percent from its January low to close the year down by -6.17percent mirroring the 6.12percent decline in the equity market capitalisation (approximately 40 percent in dollar terms).
With forecasts for inflation expected to moderate due to the base effect, NSE strategic and research analysts believe that all things equal, monetary authorities will have more flexibility with respect to interest rates and FX regime.
Okon P. Onuntuei-led team of research analysts at NSE believe that good coordination between fiscal and monetary policy should result in resolution of structural deficiencies and drive economic growth.
“We expect investors to continue to keep a close eye on the divergence between the interbank FX rate and other exchange rates in the country. Accordingly, a convergence of FX rates in the country and the performance of listed corporates will determine the level of market activity in the short-term,” they noted.