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Debt Securities

How To Predict A Stock Market Crash in Nigeria

How To Predict A Stock Market Crash in Nigeria

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Investors cash in with N1.2 trillion at Nigeria’s stock market for the month of May. ,Chartered Institute of Stockbrokers, Nigerian Stock Exchange, NSE

The stock market like most advanced form of trading platforms are not immune to ups and downs. During the boom years the stock market records massive gains as the value of stocks rise pushing indexes around the world higher. During the bust cycle values of stock prices start to depreciate as investor’s flee the stock market for better returns elsewhere. Some analyst suggest a boom and bust cycle in the stock market occurs every 15-20yrs. As a passive investor, you do not want to be caught up in all of this and have all your investments wiped out overnight.

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Whilst no one in particular knows when a stock market crash will occur, it is instructive to know that they are typically preceded by a stock market boom. Certain signs help us make predictions of a crash and we shall examine some of them;

Influx of cheap credit

As mentioned stock market crashes are typically preceded by a boom. One of the factors that fuel stock market booms are an influx of cheap loans. When I say cheap, I don’t necessarily mean interest rates alone but also the ability to obtain loans will little or no due diligence.

READ: Why you should avoid investing long term in Nigeria’s stock market

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Before the crash of 2009 a lot of Nigerians took out massive margin loans which they invested in the stock market and then gave banks the shares of those same companies as collateral. This hiked up stock prices due to the rising demand precipitating into a market crash that saw many lose their investments. Avoid the market when it is apparent that everyone can easily take out a bank loan to invest in shares.

[Read Also: Here’s how to invest in US stocks from Nigeria]

Asset Bubbles

Cheap credit causes asset bubbles which end up busting. An asset bubble is an artificial rise in the price of stocks without any fundamental justification for it. When share prices start to rise without a meaningful increase in the intrinsic value of the company it is a sign that a bubble is being consummated.

READ: Why it makes sense to invest in foreign equities from Nigeria

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In the crash of 2009/2010 a lot of stocks with very poor financial results still ended up trading at high P.E ratios that do not underline their financial fundamentals. This is mainly a result of herd mentality. During a bubble nearly all shares witness a rise in market prices. Like Warren Buffet says, he flees the stock market when others are greedy and greedy when others are fleeing.

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Economic Downturns

Since a stock market is subset of a larger economy it is only normal for it to be affected by the state of the wider economy. During an economic downturn consumer demand is very low as people tend to live from salary to salary. They do not have any disposable income to invest, preferring only to spend money on essentials. Downturns are a recipe for stock market crash as the waning demand for investment in stocks send values tumbling down.

READ: Bitcoin is highly volatile, illiquid, supports digital Euro – European Central Bank

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High Public Debt

When a country borrows too much it ends up using most of its tax revenue for servicing those debts. The effect of this can be very dangerous if the economy is in a bad shape and the country can no longer service its debts. By not servicing its debts, the company can no longer borrow again therefore leaving important economic developmental goals unattended.

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This then hampers economic growth as austerity sets in and businesses start to lose money. As businesses lose money the government now finds it even harder to earn money from taxes. That is why the price of oil is very crucial to Nigeria as that oil revenue is about 80% of our revenue as a nation. A fall in oil prices is a sign that a stock market crash may occur.

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READ: PayPal, Square make top 10 list of most valuable U.S banks

Political Instability

Investors usually take a cautious turn when during political crisis or instability. The stock market hates uncertainty, and political instability like no other can bring about that instability. Investors typically pull their money out in droves during political instability as was the case during the Arab Spring. The Egyptian stock market crashed and till now is still struggling to recover.

READ: UBA, GTBank, Zenith Bank tumble, Bears take a grip on Nigerian Stocks

Inflow of hot money

Hot money is a cruel term for foreign portfolio investments that only finds its way in liquid markets. Being a global community, foreign investors in search of high returns channel funds running into billions of naira into the Nigerian stock exchange. If not controlled, these money can help build an artificial bubble creating an impression that out market is doing well.

When the market gains, the foreign investors pull out their monies in droves as part of profit taking leaving the market in shambles and local investors seeing values virtually wiped out. An example of this was the Asian financial crisis of the 90’s. The Nigerian stock exchange regularly publishes a list of inflows into the stock market which every investor should read judiciously.

READ: Union Diagnostics calls shareholders to update records with company registrars

Increasing Market Activity

Another major sign of that a market crash may just be around the corner is when there is a sudden boom in market activity. For example, you will start to see lots of private placements, mergers and acquisitions, corporate takeovers etc. More companies will also approach the market for public offers and IPO’s even when they have no cogent reason for doing so. Companies will take the advantage of the boom to raise money at cheap rates and end up using it to finance unproductive ventures

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Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

3 Comments

3 Comments

  1. d4gmail

    May 1, 2014 at 9:09 am

    Thanks for the heads up

  2. d4gmail

    May 1, 2014 at 6:54 pm

    Please don’t see me as a pessimist, but if we are to follow the tracks of your articles and relating information so far regarding the Nigerian stock market, we might be heading for a bad storm or possibly a crash in the Nigerian stock market. This is my reason:

    Most of the non-foreign portfolio in the Nigerian stock market are owned by Nigerian politicians, political sponsors and a few big guys in the government. Now that we are approaching the 2015 elections, we might start experiencing some great amount of sell off (Money is needed to facilitate political campaigns) , which might send negative signals to the market. Scaring off short term investors and possibly foreign investors as well.

  3. oge

    July 15, 2014 at 10:28 am

    Yea. Thats is true. Most of stocks in Nigeria are truely representing their fair value plus the fact that equity investment in the stock exchange is unevenly distributed. Imagine a market with 60% foreign portfolio holding, that is a huge risk.

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Companies

Flour Mills moves to diversify funding sources with N29.8 billion bond listing

Flour Mills Nigeria Plc lists N29.8 billion bonds to diversify funding sources from the Nigerian capital market.

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Flour Mills makes one of the largest contributions to COVID-19 relief fund

Flour Mills Nigeria Plc’s fresh N29.8 bond listing will help the nation’s leading food business company to explore diversified funding sources from the Nigerian capital market, with the hope of enhancing growth and the development of the company.

This statement was made by the Group Managing Director of FMN, Mr. Omoboyede Olusanya, at the listing of the Tranche A and Tranche B bonds valued at N29.8 billion on the Nigerian Stock Exchange (NSE).

The food and the agro-allied company which has remained Nigeria’s largest and oldest integrated agro-allied business with a broad profile and robust Pan-Africa distribution issued these bonds under its N70 billion Bond Issuance Programme.

Olusanya said that the company would continue to explore funding opportunities inherent in the capital market to ensure business growth and continuity.

While speaking about the Credit Rating of the Programme, he disclosed that FMN’s credit rating, as well as the operational financing of the Group, have improved considerably.

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According to him, the bonds floated by Flour Mill will help to strengthen the company’s capital base and provide the needed working capital required by the Company. He added that Flour Mills Group will continue to deleverage and replace short term financing with longer-tenured and lower price funding to optimize capital structure and reduce financing cost.

He noted that Flour Mills will continue to explore opportunities to raise fundings via the capital market as this enables the company to diversify its funding sources and continue to play a role in the capital market as a significant player in it.

What they are saying

The Group Managing Director of FMN, Mr. Omoboyede Olusanya, at the virtual event, said;

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  • “We are delighted with the response from the market, we are happy to be listed.
  • “We are introducing an N29.9 billion listing under an N70 billion bond issuance cover; we will continue to raise funding to diversify our funding sources.
  • “The company remains passionate about feeding the nation to improve the quality of living for Nigerians through increased production and investments in backward integration.”

What you should know

  • With the successful issuance of the new N29.8bn Tranche A and Bonds, FMN has utilized its bond issuance program registered in 2018.
  • It is important to note that the Senior Unsecured bond listing includes an N4.89bn under Series 4 Tranche A of the bond issuance programme, at a 5.5% rate for 5 years, due by 2025, and a 25bn under Series 4 Tranche B of the same program at a 6.25% rate for a tenure of 7 years, due by 2027.
  • The bond proceeds will be used to refinance existing debt obligations. It will also help the company take collaborative actions to diversify the company’s financing options beyond expensive short term debt.

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Debt Securities

January 2021 FGN Bond records oversubscription of N88.3 billion

FGN bond offer has received a total bid of N238.28 billion across all tenors.

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Debt management office, DMO,Nigeria's Debt to revenue ratio, DMO suspends April 2020 FGN savings bond offer

The January 2021 FGN bond offer has received a total bid of N238.28 billion across all tenors, indicating it was oversubscribed by approximately N88.3 billion.

This fact was implicitly revealed through a disclosure by the Debt Management Office (DMO), seen by Nairametrics.

Nairametrics had earlier reported the offering of N150 billion worth of FGN bonds by the Debt Management Office for January 2021. In line with the notice, the auction occurred on the 20th of January, 2021 (yesterday).

Key highlights

The following are the key highlights of the 2021 FGN bond auction;

  • A total of N91.84 billion was submitted for the 10-Year tenor worth N50 billion, implying that it was oversubscribed by N41.84 billion.
  • The 15-Year tenor recorded a total subscription of N106.37 billion, implying an oversubscription of N56.37
  • On the other hand, the 25-Year tenor was undersubscribed by N9.93 billion, after it recorded a total subscription of N40.07 billion.

What you should know

  • Recall that the December 2020 FGN bond offer was oversubscribed by more than N70 billion, as reported by Nairametrics.
  • Nairametrics learnt that the oversubscription is sequel to higher rates across all tenors for January 2021, at 7.98%, 8.74% and 8.95% for the 10-Year, 15-Year and 25-Year period respectively, compared to the rates of 6.945% and 7.00% for the 10-Year and 15-Year tenors at the last auction in December 2020.

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Debt Securities

Collapse in domestic bills and bonds yields forcing local funds into stocks

A collapse in yields on domestic bills (3 months at 0.35%) and bonds (five-year at 3.5%) is forcing local funds into stocks.

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Nigerian Treasury Bills falls to 3.05% per annum, Implications of the new CBN stance on treasury bill sale to individuals

EFG Hermes has stated that a collapse in domestic bills yield (3 months at 0.35%) and bonds yield (five-year at 3.5%) is forcing local funds into stocks.

This is according to a recent report by the company tagged: 2021 The Year Ahead — Is the Recovery in the Price?

The report notes that current fixed income yields, of which bills and bonds are a part, seem unsustainable – citing that real 12 month yields are -13.8%. Hence, the report suggests that the country is likely to remain a cautious market for foreign investors in 2021.

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Despite the awareness, the company is of the opinion that fixed income yields in Nigeria could stay higher than 2020 lows for the next few months, which may lead to heavy bond issues in early 2021, as precedent suggests.  

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  • The company believes that the macro context is weak and policy-making is unpredictable in the country – pointing that although the country is facing a slow-burning BoP and fiscal crisis, it appears the authorities are making little efforts towards the difficult decisions necessary to put the economy and market on a sustainable footing.
  • This may, according to the company, impact earnings growth negatively in 2021 and 2022.

Accordingly, the report contends that this is one of the reasons why foreign investors avoid investing in the country’s instruments – noting that foreign investors seem to be happy selling to the local institutional bidders so that current data on holdings and flows depicts there is not much foreign money left in the market – as illustrated by foreign and domestic portfolio investment.

READ: Nigeria’s GDP growth to rebound between 1.7% and 2.0% in 2021 – United Capital report

What EFG Hermes is saying

  • “While foreign portfolio investors are seeing some relief on the backlog, until we see serious policy changes, we do not think foreign investors will become net buyers of Nigerian stocks. There is no indication that such changes are in the pipeline.
  • “We, therefore, expect a rising share of future net contributions to go to stocks, as well as cash coming from bond and bill maturities. However, we note that PFAs remain reluctant buyers, and the list of stocks in which they are happy investors is short.”

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