By The Editor
Nigeria’s equities market last week saw the biggest share price fall never witnessed since the global financial crisis in 2008. The market here joined global stock markets in pricing towards what looks very much like a lasting economic downturn. Fears over widening impact of the coronavirus on major economies gripped traders and set markets astir.
Economists and financial analysts last week changed their earlier expectations of a mild impact of the coronavirus on major economies to a warning that an outright recession may be on the horizon. The speeding spread of the virus in Europe, the Middle East and the U.S appears to have set in motion bigger and much costlier consequences for the world economy.
It was a sudden outburst of cut and run in the stock market last week, as traders forsook dividend baits in the earnings reporting season to bail out of equities. The run on equities at a time that the money market has become a dead end street seems to finally nail the financial markets here.
China’s cheap labour makes it the centre of production for Europe – which is scaling down operations in the wake of the spreading virus. Japan, like Europe, is also particularly at risk with already slippery growth quite easy to creep into a decline.
Business investment is down in the US and the manufacturing sector could fall deeper into recession with a growing chance of the country printing negative GDP in the first two quarters of this year. Massive cutbacks in output are hitting back on the global demand for oil and gas – which has placed Nigeria and other oil exporters on edge.
Earnings growth isn’t expected from the US companies this year. U.S. companies in China have downgraded revenue targets and the drop could be as much as 50 percent if the epidemic continues into the third quarter of the year.
Bank of America Securities has slashed its global economic growth forecast for 2020 and now expects the lowest economic growth reading since 2009. Credit Suisse also has lowered its global economic growth projection to 2.2 percent, which is below the IMF” 2.5 percent threshold for global recession.
The marginal economic growth that Nigeria is able to attain is driven by the oil sector and stable oil prices remain the anchor of the country’s N10-trillion budget for this year. The slightest hiccup in oil and gas puts the nation’s budget and economic growth in jeopardy. Goldman Sachs slashed its global oil demand projection by as much as one-half last week with expectations of further downward review.
The developments delivered a serious blow to energy demand in the week, sending unforeseen shockwaves through the oil market – the biggest since the 2008 financial crisis. Plunging oil prices dovetailed into bearish stock markets, heightening fears about the prospects for the rapidly-spreading health crisis sparking economic recession in the United States and elsewhere.
It is an oil bear market caused by weakening demand with limited options to oil exporters. A good part of China’s economy is shut down. Flight activity and vehicle traffic have dropped drastically with the spread of the coronavirus to South Korea and Italy. Much less oil is now needed for the slowing economic activities globally.
Investor sentiment on oil puts Nigeria’s equities market at risk. Portfolio traders have read the implications of the unfolding global events on Nigeria’s external revenue and foreign exchange reserve capacity with pessimistic conclusions. Loss of oil revenues in the face of thin external reserve will spell doom for the naira exchange rate.
The risk of exchange loss has increased for foreign portfolio traders by the winding down effect on the global economy. The slightest indication of likely exchange rate instability in Nigeria is a red flag up for the financial markets shaped to court foreign money traders.
Financial markets thrive on confidence – which has been undermined by the spreading coronavirus. The absence of a vaccine yet against the virus is the key driver of the fear of a global economic decline. As long as it may take to develop the vaccine and stem the spread of the virus, the multiplier effects of panicky financial markets is expected to gain a devastating speed in the weeks ahead.
The all-share index of the Nigerian Stock Exchange lost 1,172.16 points or 4.28 percent last week – the biggest weekly drop in recent memory. Can the equities market here survive another crash is the question mark on a market that hasn’t found its feet since the share price meltdown of 2008.
Index leading equities in banking, conglomerates and consumer goods sectors that house foreign portfolio and big time traders’ assets are leading trading volume. The run from asset to cash is expected to sustain this week with even more frightening jerk down of equities prices.
A market trader however expressed optimism that good news may come sooner than expected in terms of availability of vaccine to contain the spread of the virus. In the event of likely positive news from the World Health Organization to that effect, he said, the equities market could rebound soonest.
Another market analyst however cautions that a buy-the-dip strategy is ill advised in a market this nervous. The fleeing portfolio traders aren’t expected to return soon even if the virus is stemmed, meaning that a v-shaped recovery of equities in the near-term is far-fetched for now.
Disappointing earnings reports and low dividend yields from major equities have also contributed to the drop in share prices last week. Traders, for instance, were disappointed with the dividend yields of highly priced equities such as Dangote Cement and MTN Nigeria that announced cash dividend of N16 and N4.97 per share respectively during the week.
If and when the market recovers, it is likely to be a changed market, according to analysts. Traders and investors may reduce their holdings of the highly priced stocks and build new stakes in comparatively low-priced equities with higher dividend yields.