Neither oil rally nor IMF upgrade is enough for Nigeria stocks - BUSINESSDAY

APRIL 15, 2019



Africa’s largest oil producer is short of worthy catalysts to inspire confidence in its economy.
Nigeria has often been able to paper over deep cracks in its dysfunctional economy if oil prices and production stayed put at favourable levels. But that leverage is thinning.

That’s because while oil prices have rallied this year, with Brent crude up some 33.2 percent since January, the stock market is down about 7 percent in the same period, breaking a long-standing correlation between oil prices and stocks such that when oil prices climbed, it pulled stocks along, but if prices slumped, stocks took a beating.

When oil prices fell below $30 per barrel in January 2016, it pulled the All Share Index down to 22,456 points, which was its lowest in five years.

In 2017, while crude oil price doubled from its 2016 levels, stocks returned as much as 42 percent, making it the third best performing market in the world.

This trend showing the positive correlation between crude oil prices and the stock market extends to 2014, when oil prices reached a record $114 per barrel in August, helping stocks rally to their highest level since the market crash of 2008. Coincidentally, both stock prices and crude oil prices collapsed in 2008.

However, the correlation has fallen apart this year after flashing stress signs in 2018.
The abnormal market reaction to higher oil prices doesn’t stop with stocks.

In the year-to-date period when oil prices gained 33 percent, the naira only managed to gain 0.7 percent against the US dollar, also breaking a strong positive correlation between oil prices and the exchange rate.

That has left analysts scratching their heads over why the rally in oil prices and stable production has had such a faint impact on the currency.

To further expose the waning power of oil prices on investors’ sentiments, oil prices have gained 8 percent in the past one month but stocks and the naira are down 8.5 and 0.2 percent, respectively, according to data compiled by Business Day.

“The poor stock market performance is a reflection of sentiments towards the broader economy, as many investors say they had expected an Atiku victory, and recalled their investment after he lost to Buhari,” said Ayodeji Ebo, managing director of Lagos-based investment advisory firm, Afrinvest Securities.

“They (investors) have low expectations of another four-year term for Buhari and are only comfortable putting their money in government securities, where they are taking zero risk,” Ebo said.


“Now that investors are asking for more than a rally in oil to buy Nigeria, the government must act fast to implement the type of reforms that will send a signal that the country is open for business,” he added.

Even an IMF upgrade on Nigeria’s economic growth to 2.1 percent in 2019, from the 2 percent forecast made in January, has proved unable to significantly lift sentiments in the investor community.

Although the stock market gained 0.7 percent Friday, analysts say the rare uptick is unsustainable.

The feeling is that Nigeria has showed little signs of implementing wide-reaching market reforms, from how electricity and petrol are priced to enforcement of contracts signed by the government. And that has dealt a blow to confidence in the economy.

Critics say Buhari is yet to satisfactorily show investors that he will pursue private sector-led growth in the next four years and jettison his government-led approach that attaches little importance to private capital.

Atiku Abubakar was President Muhammadu Buhari’s main challenger in February’s presidential elections and he promised to end a wasteful petrol subsidy, multiple exchange rates, and create jobs through the private sector. He also said he would follow the path of Saudi Arabia by selling some stake in state-owned oil company NNPC to diversify the country’s revenue stream.

Although Nigeria’s political history suggests Atiku may well have done neither, his private-sector approach to tackling the country’s myriad of challenges endeared him to investors as his ideologies shone bright in comparison to Buhari who banks on his socialist schemes to create jobs and boost economic growth in a country where government spending forms less than 7 percent of GDP.

Foreign and local investment banks predicted a stock rally if Atiku won.
The fact that Nigerian stocks were also some of the cheapest in developing markets using the Price to Earnings metric only fanned optimism which dissipated after the former vice president lost to Buhari, who secured a second term over his rival by a margin of 4 million votes.

However, the stock market plot hasn’t played out in the bond market, as Buhari’s victory sparked record foreign inflows that drove bond yields to a three-year low.

Foreign investors, the biggest players in the stock market, have avoided stocks and favoured bonds because they are not convinced that President Buhari will push through tough reforms that will get the economy growing at the required level, which is closer to 6 percent than last year’s underwhelming 1.9 percent growth.

“Oil is proving insufficient and investors want more in terms of policies,” said Wale Okunrinboye, head of research at Sigma Pensions. Pension Fund Administrators are dominant local investors in Nigeria.

“Nigeria is best described as a country with developing market growth but emerging market risk, which does not make it enticing to investors,” Okunrinboye added.

Oil prices are on course for their longest run of weekly gains since 2016, according to

Bloomberg data, as the conflict in Libya and US sanctions on Venezuela and Iran constrain oil supplies. OPEC will also press on with output cuts through June.

“Appreciating oil prices are likely to provide foreign exchange stability, ability to implement 2019 budgets and economic growth in Nigeria,” said Lukman Otunuga, an analyst at FXTM Research.
“However, with uncertainties revolving around slowing global growth potentially derailing attempts by OPEC+ to rebalance, Nigeria still needs to break away from oil, and to derive growth from other sustainable sources,” Otunuga added.

The strong positive correlation between oil and stocks is because rising oil price leads to strong economic growth in oil-dependent Nigeria and oil export earnings contribute the largest chunk to foreign reserves in the country.

A larger foreign exchange (FX) reserves position usually boosts investors’ confidence in Nigerian equities and the external reserves provide security for foreign investors who may be worried about the difficulty of exiting the market at will.

“Until the right reforms happen, the country will have to endure jobless and non-inclusive growth that will be buoyed by oil and not good policies,” said Ebo of Afrinvest Securities.
Nigeria’s unemployment rate stood at a six-year high of 23 percent in the third quarter of 2018, according to NBS data.

Poverty has more than doubled in the last five years, placing Nigeria ahead of India as the poverty capital of the world despite having less than a third of India’s population, according to a Brookings Institution report.




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