2016-11-16

Uche Uwaleke

There is ample evidence to suggest that the fortunes of the Nigerian stock market are influenced by foreign investors’ sentiments which are in turn largely defined not only by domestic economic conditions in Nigeria but also by events in the global scene. For instance, it is a fact that foreign investors’ confidence especially in the Nigerian stock market in recent time has been adversely affected by Brexit. Still fresh in people’s memory is the adverse effect of the global financial crisis of 2008, which had its origin in the United States, on the Nigerian stock market that saw the Nigerian Stock Exchange All Share Index shed more than 70 per cent of its value between March 2008 and April 2009 according to data obtained from the NSE. It is famously said that “when America sneezes the world catches cold”, little wonder every part of the globe took more than a passing interest in the US presidential election last week. Now that a winner has emerged in the person of Donald Trump, just how will his presidency impact the Nigerian stock market, at least in the near term?

Global financial markets had expected Hillary Clinton of the Democratic Party to win on the strength of poll forecasts and so a bearish market was to accompany a different outcome.  Contrary to all expectations, Wall Street reacted positively to the election of Trump as the 45th President of the US. As reported by the Wall Street Journal, the Dow Jones went up 1.4 per cent to 18,590 points while the S&P 500 increased 1.1 per cent to 21,163. According to Forbes, the London FTSE 100 initially “fell two per cent upon opening on Wednesday, before recovering to end the day more than 60 points up”.  In contrast, activities on the Nigerian Stock Exchange witnessed a decline on Wednesday, November 9, after the election results were known with both volume and value of transactions dropping from about 189 million and N1.6bn the previous day to 146 million and N1.1bn respectively at the close of trading on Wednesday.

Indeed, it would amount to half truth to attribute the performance of the Nigerian stock market during the week of the US election to failed expectations. The market has been on a bearish trajectory on average for quite sometime. The release of third quarter unaudited results by listed firms did little to change the narrative. The year to date return has been negative with the index declining from 28,370.32 on January 1, 2016 to 26,170.88 on Friday, November 11, the weekend following the US elections; market capitalisation has also dropped from about N9.6tn to N9.009tn over the same period. These results have a lot to do with the decline in the activities of foreign investors as the Securities and Exchange Commission and the National Bureau of Statistics reports confirm.  According to data obtained from SEC, “total transactions at the nation’s bourse from January to September 2016 decreased significantly by 40.59 per cent from N1,560.43bn recorded within the same period in 2015 to N927.08bn in 2016 with foreign activity decreasing faster than domestic activity”.

Similarly, the NBS Capital Importation report disclosed that although the total value of capital imported into Nigeria in the third quarter of 2016  estimated to be $1.8bn represents an increase of 74.84 per cent relative to the second quarter, it amounted to a fall of 33.70 per cent relative to the third quarter of 2015. What is more, of the total quarterly increase, “85 per cent was accounted for by increases in Portfolio investment in bonds and money market Instruments while Portfolio equity continued to decline”. It is instructive to note that the countries from which Nigeria imported by far the most capital were the United Kingdom, which accounted for $1.09bn or 60.24 per cent of the total and the United States, which accounted for $426.98m or 23.43 per cent of the total. Arguably, prospects of foreign portfolio investments into Nigerian especially from the US will diminish if Trump follows up most of his campaign promises owing, in part, to a likely spike in interest rates.

According to the Economist, Trump’s plan to cut corporate taxes from 35 per cent to 15 per cent, his proposed massive borrowing and big spending on infrastructure as well as his threat to increase trade barriers could trigger inflation. This view is supported by Jamie Thompson and Sarah Maxwell of Oxford Economics who argue that Trump’s proposal to deport millions of immigrants would be a “drag on the US labour supply” and that his “harsh government spending cuts” may lead to an economic contraction.

Also, the Financial Times is of the opinion that a “trade war with China would yield higher prices for consumers and fuel inflation. It would also hurt companies that depend on Chinese imports as well as American farmers and other businesses for whom China has become an important export market”. The Wall Street Journal equally opines that Trump’s strong opposition to trade deals and threats of tariffs could adversely affect American industries that depend on international supply chains, and “potentially kick off a trade war that dents economic growth”.

Taken together, not a few believe these proposed policies pose increased inflationary risk under Trump’s presidency. Consequently, the US Federal Reserve will likely raise interest rates in response. It will be recalled that Trump had criticised Janet Yellen, the Fed chairwoman,  (whose term is expected to expire in February 2018), for her low-rates policies. If rates rise in the US as expected, foreign investors’ attention will surely be diverted away from Nigeria.

Back home, the victory of Trump is capable of exacerbating domestic conditions for stock market investment. If a number of Nigerians who migrated to the US are compelled to return unskilled, it could compound the unemployment situation in the country. Also, Nobel laureate, Wole Soyinka, is reported to have expressed fears that the level of collaboration between Nigeria and the US in the fight against Boko Haram might reduce due to what he described as Trump’s  “bunker mentality”.

The challenge therefore is for Nigeria to quicken the process of revamping the economy and making the domestic environment conducive for both local and foreign investors in the stock market. New listings are required to address the challenge of over-concentration and market dominance by a few companies. According to data from SEC, just four companies as of the end of September 2016 control over 60 per cent of the equity market capitalisation with Dangote Cement Plc accounting for the lion’s share of 32.01 per cent. The other companies are Nigerian Breweries Plc with 12.21 per cent, Guaranty Trust Bank Plc 7.25 per cent and NESTLE Nigeria Plc 6.71 per cent. Increased participation of domestic investors will help to reduce over-reliance on foreign investors and bring stability to the stock market. The faithful implementation of the 10-year capital market master plan will go a long way in addressing these challenges.

As recently disclosed by the Minister of Budget and National Planning, Mr Udoma Udo-Udoma, the unveiling in December 2016 of a “comprehensive economic development programme for Nigeria” is one step in the right direction. However, it is disheartening to note that the team of experts that worked on various aspects of this economic road map, going by newspaper reports, did not include any prominent member of the capital market community such as the Director General of SEC or the Chief Executive of the NSE whose role would have been to ensure that the capital market master plan is mainstreamed into the government economic blueprint. All said, whether Trump’s presidency bodes well for the stock market in Nigeria will depend on how the country rises up to the challenge of minimising the vulnerabilities of the market to external shocks.

Dr Uwaleke, a Chartered Accountant, Banker and Stockbroker, is an Associate Professor of Finance and Head of Banking & Finance Department at Nasarawa State University Keffi.

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