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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

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

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

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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Jaiz bank

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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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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[Read Also: NSE appoints 2face as its ‘Good Cause Ambassador’]

 

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.

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    Debt Securities

    DMO to auction N150 billion bond for May on behalf of FG

    The DMO on behalf of the Federal Government has announced the offer of N150 billion bonds for subscription by auction for the month of May.

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    The Debt Management Office (DMO) on behalf of the Federal Government has announced the offer of N150 billion bonds for subscription by auction for the month of May.

    A breakdown of the bonds shows that a 10-year reopening bond is to be offered at the rate of 16.2884% with a maturity date in March 2027; a 15- year reopening bond will be offered at 12.5% with a maturity date in March 2035; and the third and longest bond which is a 30-year reopening bond will be offered at 14.8% and mature in April 2045.

    This disclosure is contained in a circular issued by the DMO on May 11, 2021, and can be seen on its website.

    The circular from the DMO states that the bonds which will be auctioned on May 19, 2021, have a settlement date of May 21, 2021, adding that the unit sales is N1,000 per unit subject to a minimum subscription of N50,000,000 and in multiples of N1,000 thereafter.

    It also states that the interest is payable semi-annually with the redemption expected to be in bullet payment on the maturity date.

    In case you missed it

    The DMO had earlier disclosed that N150 billion Federal Government’s bonds offered for the month of March were over oversubscribed by N115.68 billion

    The total subscription received from investors for the bonds was N265.68 billion, comprising N34.69 billion at 12.25% FGN with a maturity date of March 17, 2027; N56.13 billion at 13.34% with a maturity date of March 27, 2035; and N174.86 billion at 13.85% with a maturity date of July 24, 2045.

    The auction result showed that the total bids were 50, 75 and 184, while the successful bids were 23, 43 and 91 for the 3 bonds allotted.

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    Debt Securities

    DMO announces May 2021 FGN savings bond offer for subscription

    The DMO has announced the offer for subscription of the May 2021 Federal Government Savings Bond to investors.

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    The Debt Management Office (DMO), on behalf of the Federal Government has announced the offer for subscription of the May 2021 Federal Government Savings Bond to investors.

    This disclosure is contained in a circular issued by the DMO on May 3, 2021, and can be seen on its website noting that there are 2-year and 3-year savings bonds.

    A breakdown of the bonds shows that the 2-year FGN savings bond will be due on May 12, 2023, at 7.753% per annum and the 3-year FGN Savings Bond which will be due on May 12, 2024, at 8.753% per annum.

    The offer has an opening date of May 3, with a closing date of May 7, while the settlement date is May 12, with the coupon payment dates as follows: August 12, November 12, February 12 and May 12.

    The circular also states that the unit of sale is N1,000 per unit subject to a minimum subscription of N5,000 and in multiples of N1,000 thereafter, subject to a maximum subscription of N50,000,000

    It also states that the interest is payable quarterly with the redemption expected to be in bullet payment on the maturity date.

    In case you missed it

    It can be recalled that last month, the DMO on behalf of the Federal Government, offered for subscription April 2021, Federal Government Savings Bond to investors.

    The offer consisted of a 2-Year FGN Savings Bond due April 14, 2023, at 5.522% per annum and a 3-year FGN Savings Bond due April 14, 2024, at 6.522% per annum.

    The opening date was April 6, 2021, with the closing date on April 9, 2021, settlement date on April 14, 2021, and the coupon payment dates on July 14, October 14, January 14, and April 14.

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