Coronavirus: Stock market loses N3.7tr in Q1

The value of equities in the Nigerian Stock Exchange dropped by more than N3.7 trillion from the year’s peak of over N15 trillion in mid-January 2020. Market value is also down by N1.6 trillion from the opening level of close to N13 trillion at the beginning of the year. The market closed last week with a market capitalization of N11.4 trillion with a good part of the losses occurring in the month of March.

This is the biggest loss the market has suffered since the global financial crisis in 2008. The value lost is 35 percent of Nigeria’s N10.6-trillion federal budget for the current fiscal year. The market, which is driven by foreign portfolio traders, is subject to a great deal of volatility in the evolving risks that the coronavirus outbreak poses to economies and markets around the world.

Generally, global stock markets are taking a beating never seen since the last global financial crisis. Equities traders are pricing downward in the fears of the devastating impact of the rapidly spreading coronavirus on the world economy. In factoring in the likely effect of the pandemic on asset values, stock markets generally have been roiled by volatile trading and melting share prices.

The Nigerian market faces a greater risk of volatility than most equities markets in the world due to its dominance by foreign portfolio traders. The traders take on an added risk of exchange loss – the risk of a loss in the value of the naira at which they converted the investment capital at the time of investment.

The risk of exchange loss increases with any threat to Nigeria’s crude oil revenue – which induces asset dumping and price losses well ahead of more stable markets. The traders are attracted to the Nigerian market by high rates of return but cannot wait when the capital investment is exposed to risk. Their dominance of the Nigerian stock market explains the extreme volatility of share prices, dropping ahead of global stock markets in bad seasons and rising above these markets in good seasons.

The main link of the coronavirus pandemic to Nigeria’s equities market is the fallen demand for crude oil that is planned to provide 30 percent of federal government’s revenue in 2020. Bearish oil market is driven by declining global output in the wave of economic lockdowns around the world. The global economy is seen to be headed for an outright recession.

Considerably less oil is needed to power the much reduced economic activities. Global oil demand projection has been slashed by as much as 50 percent initially with expectations of further downward review. The unfolding events have placed Nigeria and other oil exporters on edge.
There is a further downside risk on oil prices from Saudi Arabia’s oversupply that is equivalent to an oil price war. This is adding further weight to the bearish sentiments in the global oil market. Investor sentiment on oil has therefore puts Nigeria’s equities market at a risk that is for now open ended.

The equities market closed last week with the all-share index of the Nigerian Stock Exchange down by close to 5,000 points or about 19 percent from the year’s opening mark in January 2020. From the mid-January peak, the market has lost over 7421 points or over 25 percent. Share prices haven’t fallen this rapidly since the global financial crisis-induced meltdown in 2008. Oil stocks, banking and other index leading equities are driving the bearish run.

Share price drop is despite that the market is in the season of harvest – the earnings reporting and dividend payment period. The price losses are working out declining price-earning ratios and improving dividend yields generally. For banking stocks particularly, dividend yield has approached the highest levels in years. At current prices, it is as high as 22 percent for Zenith Bank, 19 percent for UBA and 15 percent for GTB.

Leading the share price drop among the actively traded equities is Nigerian Breweries, which has lost 56.8 percent of its January opening price of N59 per share at the close of business last week. Unilever has lost nearly one-half of its opening price for the year during the first quarter to close at N10.50 last Friday, as the bearish market combined with the worst operating result in many years.

Oando, from the oil sector, has lost almost 49 percent of value over the first three months of this year to close at N2.05 and Nestle Nigeria has lost its well-known stability to close a clear 48 percent down from the year’s opening price. International Breweries’ share price is down by 43 percent in the first quarter to close at N5.40 and Cadbury Nigeria has fallen by more than 41 percent to N6.20.

Stanbic IBTC Bank led the drop in banking shares, shedding close to 40 percent of its January opening price to close at N24.30 last week and Sterling Bank follows with a drop of 38 percent in price to N1.18 over the period. FBN Holdings is down by 37.7 percent to close at N4.05 and Unity Bank, which has gone below par, has lost 37.3 percent of its opening price of 67 kobo in January.

GTB closed 36.8 percent down from its opening price for the year to close at N18.45 last week. Access Bank has lost 36.6 percent of value over the first three months of the year to close at N6.40 at the end of last week.

Other major equities ahead on the share price fall are Dangote Sugar Refinery, which is down by 35.7 percent from January opening to close at N9 last week, Transcorp, which has lost 35.5 percent to close at 69 kobo over the period and Nascon Allied, which closed 34.4 percent lower than its January opening price of N12.95. Zenith Bank has lost 32.6 percent of value at the beginning of the year and Lafarge Africa is down by the same margin to close at N9.30 last Friday.

The unforeseen shockwave through the stock market isn’t expected to reverse as long as energy demand continues to suffer a serious blow. The slightest hiccup in the oil and gas market will keep foreign portfolio traders at bay and the stock market here in ruin. The equities market is the largest recipient of foreign portfolio investments and the dominance of these global money traders is sure to keep the local market continually volatile.

The volatility stems from government’s inability to attain stability in foreign exchange earnings. The back and forth run of portfolio traders reflects Nigeria’s inability to cut a stable path for the economy through the oil market cycle.

The demand shock in the oil market is expected to keep prices anchored at a record low for months at least. No one apparently has the answer for now as to how long the oil bear will run. The only positive signal so far is coming from China and South Korea – which offer a template of how the spread of the coronavirus can be largely contained. That seems to raise hopes for China resuming production in weeks.

Yet economies can be expected to remain in full or partial lockdowns for quite a while to prevent a second wave of the virus outbreak. European countries appear to have misapplied the Chinese template and have to learn the hard way. This will no doubt drag the recovery curve for the global economy and keep investment capital here at considerable risk.

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