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BUSINESSDAY HEADLINE: Nigeria goes from best to worst as stocks enter bear market

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Nigerian stocks are almost unrecognisable from their world-beating rally less than eight months ago. Rising political tensions leading to 2019’s presidential elections and a broader emerging-market sell off took a further toll on stocks Friday, with the index falling 2 percent to 35,446 points, bringing the decline since its 2018 high on January 19 to 21 percent, effectively tossing the market into bear territory.
A market is said to be in bear territory when it is down 20 percent from its last peak.
The Nigerian market has sold off despite the rally in oil prices (Brent crude is up 9 percent to $73 per barrel year to date as at Friday) which historically has a positive correlation with equities.
The Johannesburg Stock Exchange (JSE) is the only other African market to have slipped into bear territory this year after shedding 24 percent from a February peak.
Investors have also sidestepped the cheap valuation of Nigerian stocks which currently trade at 10 times earnings compared to the MSCI frontier market average of 14.05 percent, South Africa’s 17.68 percent, Kenya’s 14.39 percent and Egypt’s 16.08 percent.
A drastic slump in foreign buying amid boiling political tensions is at the heart of the stock sell-off and is likely to continue until after elections in 2019, according to Wale Okunrinboye, head of research at Sigma Pensions.
“It’s about timing,” Okunrinboye said when asked if the current cheap stock valuations serve up the best opportunity for value investors with a medium to long term horizon to buy.
“There’s higher gain in buying most of your holdings when the market is at the bottom, however it is best to start gradually accumulating now,” Okunrinboye said. Nigerian stocks have gone from best performing in January to the bottom of the pack, closing at a negative year to date return of 7.3 percent Friday.
That makes them the worst performing among African peers. South African and Egyptian stocks settled at a year to date return of -2 percent and -0.9 percent respectively at close of trading Friday, while Kenyan stocks closed at 0.9 percent.
Dangote Cement Plc, Africa’s biggest producer of the building material, dragged down Nigerian stocks the most on Friday, declining 6.1 percent to N214, bringing its losses this year to 7 percent.
That is despite the fact that the company posted another quarter of impressive top line performance in the second quarter. Relative to the second quarter of 2017, the company grew its top line by 17.5 percent to N240.3 billion after total revenue benefitted from a 12.5 percent boost year on year in volumes growth to 6.2 metric tonnes, accompanied by favourable pricing.
“Despite improving macro-economic fundamentals and better earnings outlook for listed companies, valuations of counters on the exchange has continued to decline as investors shun emerging and frontier markets particularly Nigeria on the back of heightened political risks,” analysts at Lagos-based Cardinal Stone Partners said in a note to clients.
“However, we think currently attractive valuations provide strategic investors good entry points to cherry pick fundamentally sound stocks in anticipation of the recovery when political tensions abate.”
The year 2019 looks set to be one of the most tightly contested general elections since the return to democratic governance, as the opposing People’s Democratic Party (PDP) seeks to return to power after defeat in the last general elections against the All Progressive Congress (APC), snapped a 16-year rule.
This has taken a new twist following the recent coalition by the PDP and 38 other political parties to field a single candidate to pose a formidable challenge to the incumbent. More than fifty lawmakers and two state governors have quit the APC in the past week, with the vast majority switching allegiances to the PDP.
Both parties have struggled with internal divisions but the mass defections seems to be breathing new life into PDP which ruled since the end of military rule in 1999, prior to President Muhammadu Buhari’s election in 2015.
The economy has been at the fore front of the political spat.
Investors say the economy isn’t doing so badly but a feisty political turmoil has forced them to underweight Nigeria tipped to post a 2 percent growth in Gross Domestic Product by the International Monetary Fund in 2018.
The market was down 2.89 percent on a weekly basis. The NSE Industrial index recorded the biggest weekly loss of 5.4 percent.
The best performing stock week-on-week was Neimeth Pharmaceuticals, which advanced by 33.33 percent while Secure Electronic Technology led the losers’ after declining by 19.44 percent.
Average traded volumes declined by 33. 48 percent to 185 million units, while average value traded fell by 59.98 percent to N1.667 billion.
“In the coming week, the equity market is likely to experience continued sell-offs as investors react to increasing political risk. These sell-offs, however, create bargain hunting opportunities in fundamentally strong names, in our view,” said Tajudeen Ibrahim, head of research at financial advisory firm, Chapel Hill Denham.
The Nigeria Naira was unchanged at 362.06 against the U.S. dollar Friday while benchmark 10-year bond yields fell 0.6 basis points to 14.324 percent.

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