The Nigerian stock market has been on a free fall over the last few weeks with the index posting a loss every single day except (July 17th) since the beginning of the month. The Index has so far lost over N794billion in market capitalisation.
For passive investors who have little risk appetite this certainly may not be the best time for you to invest in the Nigerian Stock Exchange. Here are a few reasons why
This is perhaps the number one reason why the stock market has lost so much in the last 20 days. Most foreign investors, economists and local financial institutions believe the Naira is overdue for a devaluation. Recent pronouncements by the CBN is also not helping matters as it has further increased activities of speculators thus widening the disparity between the interbank rates and the black market rate. Investors see this trend and believe rightly or wrongly that the CBN will devalue soon. This has triggered a sell-off in the stock market as investors dump stocks and other naira denominated assets to guard against any devaluation. No one knows when this speculation will end so any investors who is not willing to take a bet should better stay off till there is more stability in the forex market.
It is no news that Nigeria is heavily dependent on oil for its survival. As such, with the fall and volatility in oil prices investors have a bearish outlook about our economy. Why is this so? A lot of investors believe the Nigerian economy is heavily dependent on Government patronage for survival. So with oil prices falling, Government revenues will continue to drop thus affecting their ability to stimulate other sectors of the economy that depends on it for survival. Investors typically demonstrate signs of this pessimism on the stock market which is also why stocks have been taking a beating. This is also not likely to end any time soon especially as Iran is now back on the block.
Political & Economic Uncertainty
It’s over 50 days since the new government took over power yet we have not heard any major statement from President Buhari regarding the economy. He is also yet to name Ministers leaving investors with a lot more uncertainty about the economic direction of the country. Without an economic blueprint or direction, urgently required investments into the economy will continue to stall. A huge part of capital inflows into the country comes in through the stock market. If any of the recent sell-off is anything to go by then it tells us investors have lost patience in the government and have decided to take their money elsewhere. Foreign Portfolio Investments sometimes constitutes as much as 50%of inflows in the stock market. When they invest stock prices push up and when they divest stock price plummet. Going by recent events in the economy, there are little signs these guys will bring their money back soon.
Company Outlook & Results
Recently released results are beginning to confirm most analysts fears that companies are going to find it real hard this year. Financial Services sector, FMCG, Oil and Gas Industries etc. are all under dire straits. If the impression is that results can only get worse before it gets better, then it is likely that investors will continue to price stocks much lower. If you are into stocks for the short term then this is not a market for you except you have a large risk appetite.
Apart from foreign investors, we also have local investors who buy shares in the Nigerian stock market. Some of these retail investors are salary earners and invest on their own. Investors need more buyers to increase demand and then increase price of shares. That is basically how it works. Unfortunately, most Nigerians have seen their disposable income shrink in just under a month with the value of the naira basically decimated by the dollar. Our currency is now worth about 40% lower than it was last year (using black market rate). It’s no wonder inflation rate is now 9.2% from 7% a few months back suggesting it cost more to pay for goods and services. With Nigerians seeing their money buy few little goods than it used to people will now prioritise thus pushing stocks further down the ladder.