Stock Market Remained Under Pressure in Q1

Foreign exchange restrictions, persistent  energy crises and  policy uncertainty all contributed to the economic contraction and pressure in the stock market in the first quarter of the year, writes  Goddy Egene

The Nigerian stock market has suffered decline in the past two years, 2014 and 2015.  While the market declined by 16.1 per cent in 2014, it went down by 17. 4 per cent in 2015. The negative performance led to a massive depression in prices of stocks that offer attractive entry opportunity to investors.

Despite the opportunity, many investors shunned the market due to the prevailing economic situation. As a result,   the market depressed further in the first quarter (Q1) of 2016. Specifically, the Nigerian Stock Exchange (NSE) All-Share Index (ASI) fell by 10.9 per cent in Q1 falling from 28,335.01 to 25,306.22.
Similarly, the market capitalisation shed N1.1 trillion, falling from N9.8 trillion to N8.7 trillion.

However, the decline in the Q1 did not come to many stakeholders and investors as a surprise given the state of the general economy. A blurry fiscal direction, declining oil prices, policy reversal by the Central Bank of Nigeria (CBN), foreign exchange restriction, all contributed to keep many investors watching the market without investing.

Early Optimism
Early in the year, the Chief Executive Officer of the NSE, Mr. Oscar Onyema  had expressed optimism that with greater clarity on policy direction,  they anticipated  the return of investors who had remained on the sidelines throughout 2015.

“This return is predicated upon return of investor confidence as a result of: effective implementation and communication of the government’s economic blueprint; credibility in monetary policy stance; relative stability in the macro economy (oil price stability above benchmark targets, increase in tax collection to gross domestic product among others) and improved security,” he said.
Speaking on the focus of the NSE in 2016, Onyema said the exchange would focus on executing its strategy in order to continue to provide a credible platform for financing the economy.

“To this end, we intend to intensify engagement efforts with the federal government. We have also prioritised three   initiatives for 2016 aimed at achieving the exchange’s three strategic objectives of increasing the number of new listings across five asset classes, increasing order flow in the five  asset classes operating a fair and orderly market based on just and equitable principles,” Onyema said.

The NSE CEO said the current state of the market creates both challenges and opportunities for investors.
“We believe that taking a portfolio approach to investing provides the best risk adjusted alternative for participating in the capital market. As such, we want to ensure that the NSE provides a repertoire of products that will allow investors to create well diversified portfolios of uncorrelated asset classes,” he said.
The expectations of the NSE were not met in the Q1 as the market remained under pressure of weak demand for stocks from both domestic and foreign investors and poor corporate earnings for 2015 financial year.

Drop in Foreign Domestic Participation
The forex restriction and exchange rate volatility affected the participation of foreign investors in the market Q1.  For instance, equities transactions figures released by the NSE for the month of January and February in 2016 showed that foreign portfolio investors (FPI) decreased. While total transactions on the bourse increased from N84.10 billion in N117.27 billion, FPI fell 51.57 per cent to 36.48 per cent of the transactions.

Besides, monthly foreign outflows outpaced inflows, which were consistent with the same period in 2015.  Foreign outflows increased by 20.79 per cent  from N26.36 billion in January 2016 to N31.84 billion while foreign inflows decreased by 35.68 per cent from N17.01 billion in January 2016 to N10.94 billion in February 2016.

While the total domestic transaction increased by 82.89 per cent from January to February 2016, retail investors were reducing. The institutional investors  composition of the domestic market increased by 75.05 per cent from N21.85 billion in January to N38.25 billion in February while the retail composition increased by 91.95 per cent from N18.88 billion in January to N36.24 billion in February 2016.
In all, retail investors still account for 47 per cent, while institutional investors account for 53 per cent.  Out of the N115.22 billion domestic transactions, institutional investors account for N60.10 billion, while N55.12 billion.

Profit warnings
The Q1 performance was also affected by negative sentiments brought by profit warnings by some companies, led by the banks. Five banks including FCMB Group, FBN Holdings Plc, Diamond Bank Plc, Ecobank Transnational Incorporated and Skye Bank Plc sent profit warnings. Also Courtville Business Solutions Plc, Computer Warehouse Group Plc dampened investors’ enthusiasm with poor results.

Investors’ reactions to the profit warnings by banks led to the sector recording the highest decline in Q1. The NSE Banking Index went down by 19.25 per cent in the quarter in March 2016  and   recorded highest sectoral decline of  19.25 per cent  in Q1 of 2016. The shares of the five banks suffered significant decline during the review period. For instance, the shares of Diamond Bank dipped 47.8 per cent while FCMB went down by 47.4 per cent. Skye Bank lost 42.4 per cent of its value, while FBN Holdings closed the quarter 36 per cent lower. ETI shed 9.5 per cent.

SEC Woos Investors
Discovering that one of the reasons investors had stayed away from the market was frustration in having access to their dividends, the Securities and Exchange Commission (SEC) introduced the electronic dividend platform. Although the e-dividend was launched late last year, the commission embarked on public awareness campaign in the first quarter of the 2016. The campaign took the commission to Abuja, Kano and Lagos.
According to the Director General of SEC, Mounir Gwarzo, e-dividend platform will enable investors have direct access to their dividends.

“Once the e-dividend is in place, the issues surrounding stale dividend warrants will be a thing of the past, similarly, the challenges of travelling from one place to another to deposit dividend warrants would be completely eliminated. This process would eliminate all challenges associated with payments of dividends in our markets,” he said.
He added that the quantum of unclaimed dividends in the market would be reduced.
“This is because unclaimed dividends are an off-shoot from dividends of small stakeholders who have been unable to claim them,” Gwarzo said.

Operators’ comments
Commenting on the  performance of the market in Q1, a stockbroker and Chief Executive Officer of Highcap Securities Limited,  Mr. David Adonri said the market declined because of lingering energy crisis rising inflation and general low confidence in the economy.
“However, dividend yield was quite high due to low prices of stocks,” Adnori said.
On his part, the CEO of Quest Advisory Services Limited, Mr. Bayo Rotimi said  the market was affected by the  adverse economic climate characterised by declining oil prices, rising inflation, declining capacity utilisation and job losses in the manufacturing sector, uncertainties around devaluation of the naira and the delays to the 2016 budget.

“These have led to weak corporate earnings by listed companies which, in turn, translated to declining stock prices and market capitalisation.  In order to stem this downward spiral, I strongly recommend that the federal government urgently signs off on the 2016 budget, announces a detailed economic blueprint; fully deregulates the downstream segment of the petroleum industry; encourages import substitution initiatives and allows for a market determined value of the Naira. This would lead to a reflation of the economy through the commencement of the critical revamp of our dilapidated infrastructure and lay the foundation for an economic resurgence,” Rotimi said.