Company Analysis

Fleeing portfolio traders sink equities market

 

Foreign portfolio traders are on a homeward run from Nigeria’s equities market and have dragged down the market again in the cycle of re-entry and exit that has made the market extremely volatile and risky. Since the beginning of July, selling pressure has continued to mount in the market as the traders extract a dismal reading out of Nigeria’s growing political tension.

The all-share index of the Nigerian Stock Exchange has shrunk by 5,951 points or 15.5% from the third quarter opening figure of 38,278.55. Market capitalization has dropped by more than N2 trillion over the same period, nearly the federal government’s capital expenditure budget for 2018 and well over the N1.7 trillion borrowing needed to finance budget deficit for the year.

This constitutes trading capital of so many market operators gone down the drains in a flash; life savings of investors both young and ageing washed away suddenly and capital and profits of people and businesses gone with the evening winds. It is a great loss of consumer spending capacity in an economy that needs every kobo to step up recovery from recession, create jobs and reduce poverty.

High level of volatility has become the feature of the equities market here, making it highly risky. Many investors have lost their capital and traders with big paper losses, are out of business. Such a change of fortune has happened within a space of a few months from the boom the market experienced at the beginning of the year.

Foreign portfolio traders dominate the Nigerian equities market, creating a boom at re-entry periods and leaving behind a market in misery at the exit periods of the cycle. The cycle is driven by instability of Nigeria’s economic and political environments that are often expressed in exchange rate depreciation and policy uncertainty.

Policy uncertainty is the main factor in the present crisis, as political tension builds up to general elections early next year amidst a faltering economy. Capital inflow is on hold to see what policy definition would emerge eventually from a high level power play in the political arena that has at best a dicey outcome.

By the global community reading of Nigeria’s political developments, the ruling party has misfired by letting in President Muhammadu Buhari for a second term. According to HSBC Bank’s report on Nigeria, the prospect for a second term for him raises the risk of stunting economic performance and further fiscal deterioration – which would prolong the stagnation arising from his first term in office. The absence of a defined policy platform by the opposition party has clouded the policy outlook further.

There is no immediate threat to the depreciation of the naira, as firm crude oil prices and a reasonable backing of external reserve look good enough for the Central Bank to defend the current exchange value of the local currency. That seems to be the reason why the declining equities market has not yet proceeded into a crash.

The life of the market, even of the economy now hangs on the improved oil price. It is a dreaded situation for the economy and financial markets that a declining crude oil price and political tension should ever find a meeting point.

The responsibility to maintain financial markets stability belongs to the Central Bank but political instability isn’t letting the bank perform that job with ease. The well trodden but costly route to ensuring price and exchange rate stability has been to keep monetary policy unendingly stringent to entice high returns seeking portfolio capital.

This route forecloses the use of monetary policy easing even at a time it is highly needed to spur economic recovery. This explains why the monetary authority has been unwilling to move in the direction of low interest rates despite the long declining trend in inflation rate all the way from the beginning of 2017.

While high interest rates do attract portfolio traders, macro-economic stability is needed to make them stay. The traders are not fleeing because they really have better returns promises elsewhere: they are on the run because of uncertainty over the security of their capital.

To the high interest rates the economy is now consigned to live with is again added financial markets volatility that constantly shakes people and businesses off their operating courses. Nigeria is a typical example of where international money traders are given unlimited freedom to drive financial markets to destruction. It is also a good example of an economy where monetary policy has drifted from the normal course of giving birth to new businesses and nurturing existing ones to pleasing portfolio traders.

The situation fits into one of robbing local investors and businesses to fill up the cups of international money traders that actually need to be tamed. The outcome is a capital market that has lost its bearing. It has detracted from a market where long-term investors can grow their capital and pull it out with huge returns for retirement. Portfolio traders have ended that feature of the market.

Neither does the nation have anymore a market for new businesses to raise start-up capital or existing enterprises to get new money for expansion. What portfolio traders have made out of Nigeria’s once booming capital market is hardly differentiable from gambling – ‘enter before they come, leave before they go’.

Regulators around the world are taking steps to prevent financial markets from harming the economy and speculation from driving the flow of financial capital. A policy measure rated good enough to deal with the destablising activities of portfolio traders here was proposed but rejected in the heat of the stock market meltdown in 2008 – a bailout fund to act as a stabilising mechanism in volatile market situations.

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