With the Nigerian stock market falling from its glorious ranking of 2017, politics and other macro factors continue to impact negatively on the market. Analysts are of the view that selloffs are likely to persist. OLUSHOLA BELLO writes.

Remaining less than four months to go in the year 2018, investors in the domestic equities market recorded losses as stocks have declined from their world-beating rally less than eight months ago.
Last year, the Nigerian bourse recorded 45 per cent returns on investments to investors. As a result, it was ranked the best performing bourse on the African continent and the third best in the entire world. Unfortunately, this is not the case in 2018 as the NSE All Share Index (ASI) recorded year to date loss of 10.81 percent and a market capitalization loss of N1.156 trillion as at September 6, 2018.
LEADERSHIP showed that market capitalisation, which measures the worth of equities, has depreciated from N13.609 trillion at the beginning of the year to N12.453 on September 6, 2018. Also, ASI recorded a year-to-date decline of 10.81 per cent, having dipped from 38,243.19 at the beginning of the year to 34,110.22 on September 6, 2018.
A further analysis of the NSE year-to-date performance showed that the Nigerian bourse has delivered the worst decline among the leading African bourses. It was followed by Johannesburg Securities Exchange with a decline of about 0.11 per cent. Ghana Stock Exchange is leading with the best growth of 8.02 per cent, followed by Egypt with 6.5 per cent, Mauritius 1.06 per cent and Kenya 0.64 per cent.

Factors Responsible For Stock Market Decline
The drastic decline has been associated with the prevalent political tensions and uncertainties in Nigeria, ahead of the country’s presidential, gubernatorial and senatorial polls scheduled for early 2019. The market has also reacted to significant selloffs by foreign investors, absence of positive market triggers, disappointing economic data release, particularly in the GDP data, wherein a contraction in the oil sector led to slower pace of growth, improved yields in fixed income market, which created a more attractive alternative investment for investors and the recent news of the Central Bank of Nigeria (CBN) fine on Stanbic IBTC and Diamond Bank for illegally repatriating funds on behalf of telecommunications company MTN Nigeria, which led to sell pressure in the listed banks.
Market analysts said the negative performance by the NSE was not a surprise considering the fact that foreign investors have been taking flight since the hike in rates in the United States. They added that some investors have also been selling down to guide against negative impact of the forthcoming general elections.
While some investors have remained confident in the strong fundamentals of the market, such confidence has been challenged by developments in the political scene in the last one month. The developments include defections from political parties and utterances capable of heating up the polity.

Unfolding Political Events In The Economy
Afrinvest stated that ahead of the 2019 general elections, rising political tensions and heightened insecurity, which have intensified polity uncertainties are major downside risks to watch out for in the remaining months in the year. The strains in the polity have been aggravated by the increasing rifts between the Federal Executive and Legislature, culminating into the delay in approving and signing the 2018 budget, including the supplementary budget. However, while we expect these and other critical issues to persist in the near-term, we believe there will be no lingering impact post-elections. Hence, we expect the risks to dissipate as the elections wind-up, potentially reversing risk-averse capital flight trend.

Foreign investor’s activities in the stocks market
Foreign investors are the major player of the Nigerian equities market. The market downtrend has shown the withdrawal level of the foreign investors from the market. According to analysts at Cordros Cpaital Limited noted that the broader risk-off sentiment by foreign players stemming from the meltdown in Emerging Markets, global trade war concerns, and political risks surrounding the upcoming 2019 election continues to contribute to the equities market’s poor performance. For context, as shown in the NSE’s recent Foreign Portfolio Investor activity report for July, total transactions held by foreign investors dropped by 64.68 per cent to N36.17 billion, against N102.41 billion in the previous month. Also, foreign players’ proportion of total trades on the exchange dropped to 24.76 per cent, from 54.54 per cent in the previous month, which is also well-below the monthly average of 50.47 per cent recorded so far this year. However, it is worth stating that inflow of N19.83 billion was recorded during the review period, against N16.34 billion worth of outflows recorded in June. Total domestic transactions in July, as shown in the NSE’s report, accounted for 75.24 per cent of total transactions held in the month, with month-to-month growth of 28.73 per cent to N109.90 billion. Furthermore, for the first time since September 2017, retail investors accounted for majority of 59.53 per cent of total domestic transactions and surged 124.66 per cent month-on-month, while institutional investors accounted for 40.47 per cent of domestic transactions and was 20.91 per cent lower than the previous month.
The drop in institutional participation can be linked to the decline in Pension Fund Administrators’ which make up a majority of institutional investors exposure to domestic equities, which according to National Pension Commission (PENCOM) latest report for May, was 7.51 per cent lower than the previous month, despite a 0.57 per cent uptick in total pension fund assets to N8.14 trillion.

Stakeholders views
The chief executive office of Nigerian Stock Exchange (NSE), Oscar Onyema earlier in the year said that happenings in the Nigerian political space and possible foreign exchange fluctuations are expected to impact the stance of the country’s capital market in 2018.
He however said that such impacts will be short lived and the performance of the underlying business activities will ultimately determine market performance.
The chairman of Association of Stockbroking Houses of Nigeria (ASHON), Chief Patrick Ezeagu, said, “perhaps we may remind the political class that uncertainties and all sorts of insecurities that currently pervade our country affect investors’ sentiments, asset valuations, market and country risk profile and portfolio allocation decisions. In recent times, trading statistics on the securities markets in Nigeria have been reflecting investors’ apathy to unprecedented level of tension that portends likely breakdown of law and order in the 2019 general elections.”
He further said, “it is an unassailable investor-behaviour that bad news trigger market panic and investors over-react to such news. As the country’s economic barometers, the securities markets in Nigeria have continued to reflect investors’ apprehensions to instability in the political and economic landscape through all their indices. This has largely accounted for the inability of our market to fully recover from the effects of the 2008 financial crisis, notwithstanding the efforts made by the regulators and operators to fully revive the market. There is clear and present danger if the trend continues.”
Analysts at Afrinvest Limited noted that “weak sentiment continues to weigh on the Nigerian equities market despite improving economic fundamentals signifying potential growth for companies, driving profitability and in turn returns to investors.
“While some of the factors that have pressured the performance of the market in recent times have dissipated, risk factors such as, increasing incidences of trade protectionism, rising treasury rates in advanced economies and systemically important central banks as well as emerging market (EM) frailties still linger and could further impact negatively on the Nigerian market.”
They noted that “the contagion effect of emerging and frontier market routs resulted in a moderate slowdown of portfolio investments into Nigeria in first half of the year; sadly, this is expected to continue impacting sentiments as foreign portfolio participation in domestic equities remains feeble.
“Furthermore, persistent sell-offs, especially in second half of the year, cannot be dissociated from increasing political and policy risks, which historically define election cycles in Nigeria. Nonetheless, we do not expect these to have substantial impacts on the broader macro-economy given the relative stability in external economics, particularly steady and positive outlook in oil market and the commitment of the Central Bank of Nigeria (CBN) in achieving a stable foreign exchange market.”
Explaining the situation, the CEO of Cowry Asset Management, Mr. Johnson Chukwu, said “the earlier part of this year witnessed a lot rumbling in the ruling party, which scared foreign investors away from the market. So, 2018 is completely different from 2017 because 2018 is almost an election year because it precedes a national election with a lot attention now focused on political activities, leading to heightened political risk, which investors are shying away from. That is why also the equities market has not done well in 2018.”
The chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion added that the prolonged downturn has made the NSE rank among the worst performing markets in Africa and even globally, after achieving over 45 per cent gain that helped it emerge best performing exchange in the world in 2017. This growth trajectory extended into January 2018, suspending the usual January effect with a huge gain of over 17 per cent in one month, the first of its kind in the last 15 year.
He however said that as the year progressed, factors against the market started unfolding especially after the fiscal authorities seemingly went to sleep in the first quarter of the year, failing therefore to induce some form of stimulus or reforms to sustain the growth tempo, saying that instead, government spent all of the time celebrating the nation’s emergence from economic recession, without giving a direction, a situation that ultimately reflected in the nation’s second quarter, 2018 GDP which declined to 1.5 per cent from 1.99 per cent.
Omordion noted that this was also happening at a time of rate hike in developed economies and markets, a situation that triggered early selloffs and profit booking, heightened by political risks and economic slowdown, coupled with the delayed passage and assent of the 2018 budget.
According to him, even so, budget implementation and style of funds disbursement are conspiring to making Nigerians not to feel the impact of the N9.1 trillion budget. Feelers are that most of the capital projects approved by the Federal Executive Council (FEC) are not cash-backed, contrary the impression given to the citizenry. This may have accounted for the poor level of economic activities and seeming illiquidity in the country.

Outlook For The Market
Following the negative performance of the equities market so far, investors are beginning to doubt if there is room for potential upsides going forward, amid political tensions, risk-off sentiment for emerging market assets and a lackluster earnings season.
Analysts at United Capital Plc said that “while we are of the opinion that the recent market setbacks could be an attractive entry opportunity for local investors, we believe FPI dominance will continue to guide local investor sentiment. However, given the fact that recent sell-off are not macro-driven, we expect possible return of FPIs after the political environment calms, to spur the market higher.”
Also, Afrinvest stated that “while risk factors remain on the horizon, we are optimistic of an impending bullish streak in the market as equities near trough points. We advise investors to be on standby as we perceive the turning point imminent whilst echoing our long term focus on fundamentally sound stocks with attractive entry prices and prospects of, at least, double digit upside potentials.”