Nigerian Equities: It Ain’t Over Till It’s Over
As a foreign investor, you couldn’t have done much worse than investing in the Nigerian stock market in 2009 (OK, you could have bought Zimbabwe dollars). With the Lagos All-Share Index down 27.5% since January 1, it’s the worst performing equity index in the world so far this year. Add to that a 9.2% drop in the currency, and you’re looking at a third of your investment gone in one month.
With the price of oil down more than $100 per barrel from the July peak, it’s not particularly surprising that sub-Saharan Africa’s biggest (until recently) producer has run into problems. The lack of oil money circulating through the economy is sure to impact businesses (Business Monitor International is forecasting GDP growth of just 3.6% in 2009, from 6.3% in 2008, and risks are to the downside), and also make available less liquidity for investment in the market.
But it’s not just oil that’s giving the stock market a headache. Foreign investors largely packed up and left after the country imposed a maximum downside limit of 1% on the index back in August (which had the effect of seeing the market fall by a small margin for 34 straight trading days before the limit was removed). Given the rise in global risk aversion, I do not see a return of these investors in the near future. More worryingly, I’ve warned before about the looming potential for crisis in the banking sector, shares of which make up a not insubstantial 48.6% of the exchange’s total market capitalisation. Should some of the banks go down, there could be significantly more downside ahead.
Lagos All-Share Index
In that spirit, I am keeping my eye on 20,000 first (the market closed yesterday at 22,737), with a drop to 12,000 increasingly possible, especially if there’s trouble with the banks. If the index does end up hitting 12,000, that would put its total losses from the March 2008 peak to 81.9%. That’s not as bad as the 93.6% drop seen in the Icelandic index, but it’s still catastrophic.
January 30th, 2009 at 10:39 am
Soludo has been going on about how the Nigerian economy is properly insulated from the global economic crisis. But one wonders whether he has the ears of the presidency like he did under Obasanjo.
Granted the foreign investors are gone (no surprises there) but local investors like myself who are in it for the long haul are now wondering whether to cut and run.
The real question on my mind is… how do we know when the fat lady starts singing?
February 3rd, 2009 at 10:37 am
As an analyst and trader in the Nigerian market visiting this blog for the first time, I felt compelled to make a comment. Its very true the Nigerian Equity market situation has gone bad beyond any body’s expectations, I wish to disagree that foreign investors left because of the maximum downside limit of 1%. Foreign investors were already leaving, I believe in response to the global financial meltdown, contributing largely to the down turn. The prolonged bearish run is largely contributed to the excesses of banks in advancing merging loans, most of which are going bad. In a drive to cut further losses, they are selling stocks pledged for such loans by either stockbrokers or other investors at just any price. While the declining price of crude is adding to the problem, as the economy itself appears to be under threat, I believe, the index will not go down as far as 12,000 whether in the short or long term. The market may stabilise at 20,000 if its goes down further. Investors who have a longer term investment horizon may not have any better time to invest in many blue chip companies currently trading at prices below their book values. Investors who have been trapped in the fire may have to be patient. Exiting now may mean exiting at the bottom which may not be the best decision to make having waited all this while. For new entrants, you may enter now only if you do not wish to invest for a short term or with borrowed fund.
February 3rd, 2009 at 11:57 am
The picture painted by BMI about the nigerian market is rather too gloomy. While it is true that the Nigerian market performed woefully in the last 9 months, it is wrong to assume that the trend would continue for the rest of the year. Corporate performance of most companies remain strong and positive even in the midst of global crisis. The equity market is currently trading at P/E ratios of between 4x and 8x, one of the lowest in the world. Though the decline in foreign exchange earnings and recent depreciation in the naira have adversely affected the budget and economic projections, we note that the nigerian economy is resilient and do not see the Nigeria All Share Index coming down as low as 12,000 points. We are positive that the fortunes of the market will turn around as soon as we begin to see positive signals from America, Europe, Japan, China and other markets. In our opinion, the current prices may be the lowest it will go. This means that significant upside potentials exists for both domestic and foreign investors whose perspectives are long term.
February 3rd, 2009 at 3:17 pm
I would agree with Pam Davou both that foreign investors were already leaving the market because of the global financial meltdown (though I think the 1% downside limit certainly hastened the process and destroyed whatever confidence remained) and that much of the market’s drop is due to the bank loan problem.
Also, for sure, when the Nigerian market hits bottom, some real deals will be on offer. That said, I’m not convinced the bottom is necessarily at 20,000. I think the Nigerian economy is only going to get worse over 2009, and a reversal of the stock market’s losses is going to be difficult while uncertainty over the scale of margin lending hangs over the banking sector.
As for Henry Ogbuaku’s contention that the fortunes of the market will turn around once we see some positive signals from America, Europe, Japan, China and other markets, well, that may be true, but I think 2009 is going to be even worse economically than 2008 for these countries, meaning the recovery could be a long way off. While some of this has probably been priced in, from a technical perspective, unless there is a significant bounce off 20,000, I still think a break below 20,000 puts 12,000 in reach.