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Oil: Share prices may crash by 28% before elections

By on January 18, 2015

The free fall in share prices in the Nigerian Stock Exchange is set to hit 28 per cent, up from 17 per cent, before the general elections in February, a review of the current market trend and reports have shown.

Nigerian equities had crashed by 17 per cent during the first eight trading session in this year.

This came after the NSE had emerged as one of the five worst performing stock market in 2014 with a negative return of 16.14 per cent.

According to findings by our correspondent, the continued decline in crude oil prices and the increased political risks in the country will make the free fall of stocks listed on the Exchange to continue until the second half of this year.

Neither the NSE nor analysts expect any major change in the market trend in the first quarter of the year.

Capital market analysts told our correspondent that the going by the current trend, the NSE All-Share Index, which tracks the general market movement of all listed equities on the Exchange, would decline by between 28 to 30 per cent before the general elections and by as much as 40 per cent if the price of crude oil fell below $40 per barrel.

The drop could be even higher if the naira is further devalued and there is an outbreak of violence after the elections, they added.

The Chief Executive Officer, Highcap Securities Limited, Mr. David Adonri, said there was a precedent upon which such an expectation could be based, especially in the face of declining crude oil.

He said, “Currently, two major factors are affecting the equities market; the dropping price of crude oil, which has about 80 per cent effect on the capital market and the increasing political risks as the general election draws near, which is responsible for 20 per cent of the drop in the equities market.

“During the financial meltdown, when the price of crude oil dropped to between $30 and $40 dollars, the NSE All-Share Index declined to 19,000 basis points. Therefore, it is not wrong to expect that the index can decline to 19,000 or 20,000 points should the price of crude oil drop to as low as it did during the meltdown.

“Also, political risk would continue to increase until after the election and the combination of these factors really can push that index to as low as 19,000 basis points.”

The Chief Executive Officer, Enterprise Stockbrokers Plc, Mr. Rotimi Fakayejo, who noted that there could be a rally for a day or two in the coming days, said such rises would be insignificant.

“By the time we get to the elections, the index would most likely be in the range of 25,000 basis points,” he said.

A drop to 25,000 basis points would mean a 28 per cent plunge for the index year-to-date, while a drop to 20,000 basis points as projected by Adonri, would amount to a crash of 42 per cent for the index year-to-date.

Adonri, however, said if the prices of crude recovered dramatically and the elections were conducted free and fairly and true winners emerged to the satisfaction of the electorate, the market would recover after the election.

But such a recovery is not expected until the second half of the year. That is because the recovery is tied largely to a rebound in crude oil prices and the successful formation of a new government after the elections.

The Financial Derivatives Company Limited, a research firm run by economist, Bismarck Rewane, shared a similar view in its outlook for 2015. It also projected that equities would decline significantly in the first half of the year.

The firm, which said the impact of the naira devaluation would be felt most in the first quarter of the year, said, “Election fevers and weak earnings will usher in a plunge” in the second quarter.

While the FDC expects weak earnings to remain an issue in the third quarter, it expects the country and the market to witness stable growth from the third quarter to the fourth quarter.

Explaining its view that oil prices will drive recovery in Q3/Q4, the FDC said, “The positive correlation of the Nigerian bourse will drive the recovery.”

On Wednesday, the Chief Executive Officer, NSE, Mr. Oscar Onyema, observed that Nigeria’s 2015 macroeconomic performance was expected to be influenced by a number of variables, including crude oil prices, foreign exchange movements, national security, global financial markets, fiscal and monetary policies as well as the outcome of the 2015 elections.

He also said “the strengthening dollar may continue to precipitate foreign portfolio investment reversals, which remains a real threat to the Nigerian capital market.”

 

[Punch]