The bulls had only one month to dance on the Nigerian stock market before they were swallowed by the bears. In January, the stock market showed a strong return of 16% and it looked like the bullish run seen in 2017 was going to continue through 2018.
The Nigerian exchange was the third best performing market globally in 2017, posting a return of 42.3%. So investors approached 2018 with optimism, some of which may have been misplaced.
Nigeria’s stock market has ended the first half of 2018 marginally positive with a return of just 0.09%. The market would have ended the first half in the red but for a 1.1% gain by the All Share Index (ASI) in the last trading week. However, the second quarter performance for the March to June period was very bearish, as the market declined -7.77%.
Trading room at the Nigerian Stock Exchange.
While emerging markets are suffering generally due to rising yields in the US, the case for Nigeria is a bit different. Rising oil prices have always had a positive impact on stock market performance. This is because the country largely depends on oil sales for 95% of export earnings and 70% of government revenues.
With rising oil prices and production, Nigeria has been able to boost its external reserves which now stand at US$48 billion, the highest in over three years. The naira has been largely stable. Inflation has been on a consecutive decline [16 months] to a low of 11.6% in May. However, all the positive macroeconomic indices have failed lift the stock market and the suspicion is that investors are already suffering from pre-election anxiety.
Election Anxiety?
Nigeria’s next its national elections are scheduled for February of 2019, which is just about eight months away. Past trends have shown that the stock market tends to slow down as elections approach in the country as investors, especially foreign investors, start getting nervous about the potential outcome of the elections and the policy changes that could result if the sitting government fails to get re-elected.
In financial cycles, this nervousness has created a protective investor behavior called the ‘365-day rule.’ One year to the elections, foreign investors start winding down on investments that are more than a year and increasingly go short-term. The idea is to hold only financial instruments that can easily be liquidated before the elections and wait out the election period. This cautious attitude tends to dampen foreign investor activity in the stock market and consequently overall market activity.
But this time around, the traditional pre-election anxiety has not been helped by the long delay in the approval of the 2018 spending plan of the federal government. The 2018 budget was only signed into law in June, after more than seven months of deliberation by the National Assembly. The Nigerian fiscal year is supposed to start from January and end in December. This means that the budget is coming six months behind time. However, the National Assembly had technically extended the 2017 spending plan to May, which means that technically, the 2018 budget was only a month behind schedule.
Nonetheless, the delay in not getting out the 2018 out early was not lost on investors and the business community. Most government parastatals ran out of their 2017 budget provisions early in 2018 and were basically waiting for the new provisions in the 2018 budget in order to get on with their planned activities for the year.
The consequence of the delayed budget is that things really slowed down in the period that government offices were waiting for the 2018 budget to be passed. The multiplier impact of government spending on the economy, which could have also positively impacted on the performance of the stock market, was muted by the delay in the passage of the budget.
Even of more concern for investors is the expected disruption to macro-economic stability that the late passage of the budget is will trigger. Because it is a pre-election year, the government will be in a hurry to speed up the implementation of projects earmarked in the budget to please the electorates. Therefore, a good proportion of the US$25 billion (N9.12 trillion) budget will be spent in the next six to nine months ahead of the 2019 election.
Such significant spending in such a short period will put pressure on prices of goods and services and reverse the 16-month consecutive decline in inflation already witnessed. The pressure on inflation will be further compounded by pre-election spending by political parties for political campaigns. The exchange rate of the naira will also come under pressure from the increased cash that will come into the economy in the next six to nine months.
Added to the macroeconomic instability is the high level of political uncertainty in the air. The ruling All Progressives Congress (APC) have become politically divided even as President Muhammadu Buhari’s popularity takes a beating from rising insecurity in the country. However, the opposition that should be getting ready to unseat President Buhari also remain highly divided.
In the PDP alone, there about five presidential aspirants all seeking to unseat Buhari in 2019. A divided and weakened ruling party and the opposition has created a high level of uncertainty around the 2019 elections, which is another reason investors are getting nervous about any investment that does not provide them with a very quick escape route.
So now it is not easy to forecast how the stock market will perform in the second half of 2018. Rising interest rates in the US, rising uncertainty over the outcome of the 2019 Nigerian elections and expected deterioration in macroeconomic stability and as well as rising insecurity level are factors that could dampen investors’ appetite for stocks and increase their nervousness.
On the upside, a possible rise in oil prices as the sanctions against Iran come into effect, the consequent further improvement in external reserves, a boost in corporate performance and purchasing power arising from the implementation of the 2018 budget, are all factors that could drive the stock market upwards into a bullish territory in the second half of 2018.
Looking into the future, it is difficult to forecast if the positives will outweigh the negatives in the second half of 2018. However, uncertainty is the reason investors will remain nervous about the stock market and remain reluctant ahead of Nigeria’s presidential election.
