The Nigerian stock market is currently and arguably on its best bullish run on record. It has gained a whopping 25% year to date and N3 trillion in a quarter with even more room for upsides. Average price earnings ratio is still in the region of 15x which suggest we not yet in the bubble territory.
However, the market is not immune to exogenous threats, which if they occur collectively or in part, could stop the recent gains we are experiencing. Here are the notable ones.
Further drop in the price of oil
The global price of crude oil has trended downwards in recent weeks as markets fear the world is still full of oil supplies. Despite the much-awaited production cuts agreed by OPEC and non-OPEC countries, the outlook for the price of oil seem rather bleak. For Nigeria to experience another shock like we did in 2014, the price of oil will probably need to fall by half, to about $25. While this is highly unlikely, it cannot be ruled out completely.
This perhaps is the most important factor that could stop this bull run. In fact, the pipeline bombings in 2015 and first half of 2016 are one of the reasons why Nigeria slipped into a recession. It is also not a coincidence that the truce reached with the militants is also one of the reason why the economy seems to be on a rebound as buttressed by a rise in Nigeria’s crude oil production and export.
Worldwide Economic Downturn
The global economy seems to be soldering on despite initial fear of a global downturn following Brexit and the impending US election. However, as the US anticipates rising inflation, the US Fed’s intent on increasing rates could slow down funds flow into emerging markets like Nigeria. The US Fed last increased rates in December 2016 and plans further increases later this year.
The growing ethnic tensions in Nigeria is a potential risk to the country’s political stability. With recent threats by some Northern elements in Nigeria to chase out Igbos of South Eastern origins of Nigeria and the reprisal from their Southern neighbours heighten, the government is doing all it can to calm tensions. The Acting President has been meeting with traditional rulers across the country while the state security service has also issued our press releases urging parties to remain calm. The urgency of this situation cannot be over emphasized. If things go out of hand such as an ethnic related killing in any part of the country, the we could be in for a long sell off.
In a little under two weeks we would have approached the end of the second quarter and the first half of the year thus ushering in the earnings seasons. This is when we get to see the results of publicly quoted companies in Nigeria. One sector that will be closely watched will be the banking sector. If their results show any sign of financial strain such as high non-performing loans or significant drop in capital adequacy ratios, then a sell off could likely ensure. The financial sector led by banks is an indication of how resilient the Nigerian economy is. The last time Nigeria was in a bull run such as is being experienced now was in 2007 – 2008. That run was cut short when it was revealed that Nigerian banks had lost hundreds of billions in margin loans.