Globalstock markets are going to have difficulties breaking the glass ceilingserected over the twin problems of a global health pandemic and a disruptedworld economy. Slow global economic growth will likely mix with huge fiscaldeficits amidst rising healthcare expenditure to create the worst of allworlds.

Myths: Counting on Self-correction 

Theaverage economist loves the idea of a self-correcting market, but thepains of a self-correcting market are either too severe or the time too long tobe practical. This explains why most governments prefer to dodge the bulleteither partially or totally. Following this argument (which many people wouldcontest) the development of Nigeria's equity market must involve a clever setof collaborative actions amongst a network of market stakeholders. Analystsobserve that to expect the local stock market to take off on the strength ofits organizational force is like waiting for a pregnant woman to give birth toa child unaided, this is possible but risky.   

Afew local equity traders note that the domestic stock market requires supportwhether solicited or unsolicited since the consequence of unfettered marketaction could prove damaging to the stability of society. The NSE, therefore,needs to build upon its progress in the last two decades to reach the nextlevel of its evolution where more instruments of bellwether industries arelisted on the Exchange and more sophisticated trading activities take place.The Growth Board creation is a step in the right direction, but it must movefrom the realm of the drawing board to the realm of action.

Also,the demutualization of the NSE needs to be concluded quickly to bring themarket to the contemporary standards of equity trading platforms in Europe,Asia and the United States of America (USA). The demutualization of theExchange would move it from being a broker-dominated Exchange to aninvestor-oriented Exchange with higher governance standards.

Risks 

Thederivative market has been an area that the Onyema-led NSE has shown a keeninterest in initiating and developing but stockbrokers have been reticent.According to one broker, "you build a derivative market on a fundamentalunderstanding of asset classes and the pricing of their spin-offs; traders inNigeria still have a knowledge gap that would need to be closed if they desireto trade in this neck of the woods" he said. However, the trader furthernoted that "derivatives can be very risky and require high technicalcompetence. As things stand today local market traders have neither the riskappetite nor the basic skill sets to handle such sophistication. This is whereI think less is more, and for now, we should continue to dip our feet in aslow-moving river rather than take a dive into a deep blue sea".

Thismay be true, but by not filling the "white spaces" open in the domesticfinancial market, traders would be allowing for inefficiencies in asset pricingand limiting the breadth of asset categories. An improvement in asset classescould likely increase capital importation and strengthen the country's foreignexchange rate. Besides, with more tradeable assets available on the NSE, themarket would become more attractive to both local and foreign investors andlead to domestic asset deepening (see illustration4).

Illustration 4:  COVID-19 andOpportunities; Surfing A Pandemic

Political Risks, A Matter for Concern?

Shouldinvestors be worried about Nigeria's domestic political risks? Certainly. Therecent Standards & Poor (S&P) credit rating for Nigeria was B-/Blong-term and Short-term, the country's long- and short-term national scaleratings were at 'ngBBB/ngA-2.

Therecent ratings reflect major country risk concerns that have political risk asa chief component. The relatively weak security situation in the country,especially in the Northeast and Northcentral parts has stirred internationaland domestic investor anxiety around the county's economic stability andsustainability, especially its harried agriculture, minerals and mining belts.Food inflation of the country for July 2020 was put by the national statisticsoffice (NBS) at +15.48% as against thebroader headline inflation rate of +12.82%.

Economicanalysts have observed that the incessant farmer/herder conflicts, rural andurban banditry, highway kidnappings and killings by individuals allegedlyassociated with a local insurgency group, Boko Haram, have cost thecountry a major drop in agricultural productivity, especially in thebreadbasket states of Benue, Plateau, Adamawa, Taraba, Bauchi, Gombe and Yobe (see illustration 5).

Illustration 5:  Map ofNigeria, Inside the Breadbasket

Source: Proshare Research, Ecographics

Thepush of insurgents towards the Southwest draws a dark picture of a sinistermove to take over one of the most economically, industrially, socially andpolitically developed parts of the country. Places in Oke Ogun, Oyo State likeShaki and Iseyin are already under the onslaught of armed herdsmen believed tohave ties with major Sahel region terror organizations. The same anxietyreoccurs within the country's machine manufacturing and industrial fabricationbelts in the Southeast and South-south.

Fearsof widespread sociopolitical and economic troubles ahead have become a dominanttheme spoken softly amongst the country's elites and have worsened thecountry's credit risk rating amongst international credit agencies andheightened the risk factors associated with Nigeria's political andsocio-economic stability.

Opportunities

Therelative weakness of the market in respect of asset classes and the number ofcorporations listed on the Exchange may create opportunities for the market toleapfrog ahead of expectations. Contrary to most popular perspectives, theCOVID-19 pandemic reinforces opportunities just as much as it posesthreats. 

Thelimited tradeable assets within the equities market mean that local investorsmust find other ways of making money after adjusting for inflation. With therecent 2020 inflation rate at +12.82%, andbond yields at between 1% and 1.3% in the secondary market and about 6.7% forten-year bonds with a coupon of 12.5%, there is minimal wriggle room for thosewith cash to put away. The Nigerian Eurobond market has become increasinglyattractive to investors with a coupon of 6.75% and a yield of 3.79% formaturity in January 2021 but as quoted on August 31, 2020. Diaspora bonds withmaturity in January 2022 traded on August 31, 2020, at a coupon of 5.63% and amarginal yield of 4.56%. Within the context of a COVID-19-depressed economy,Eurobonds appear to be a bright torch, even if a flickering one. Eurobonds seemto be some of the best-in-class investment vehicles in 2020 featuring low riskand modest inflation-adjusted returns (seeillustration 6).

Illustration 6:  Where Willthe Next Investment Honeypot Come From?

 Source: Proshare Research, Ecographics

Onthe other hand, real estate, by some judgment, is a low-risk asset with thepossibility of relatively high returns. The challenge, however, is that thesector's presumed risk status could be much higher than acceptable thresholdsfor risk-averse investors. Analysts note that the COVID-19-induced recessionwhich worsened as a result of a fall in international oil prices and federalrevenues would likely cut disposable incomes and hurt analyst's economicoutlook for Q4 2020 as investors foreclose on their appetites for fixed assetswith indeterminable cash flows. 

Preciousmetals such as gold and silver have gone up in the last few months but theseassets are essentially countercyclical, when strong global currencies weakeninvestors tend to seek solace in assets that are tangible like precious metalsbut with global supply chains being reestablished and factories coming back online several countries will likely see a reversal of falling GDP growth ratesand a strengthening of their currencies which would lead to investors dumpinghard metals and returning to more liquid assets denominated in hard currencies.Going long on major currencies seems to be a smart money move, but some currencieswould be more volatile than others, therefore, currency hedges and stop-lossarrangements may prove useful, especially between Q4 2020 and Q2 2021.

Softcommodities will still have a hard time into 2021 but as manufacturing picks upand the coronavirus abates some commodities should experience price recoveriesand rise above even pre-COVID-19 levels. 

Downloadable Versions of NSE Ten Years After Takeover Report (PDF)

1.  Executive Summary: NSE Ten Years After a Takeover: The Good, The Bad and Undecided - Sep 16, 2020

2.     Full Report: NSE Ten Years After a Takeover: The Good, The Bad and Undecided - Sep 16, 2020