The hot political climate this year has chilled equity market performance since January. The continuous drama of political defections, siege of the National Assembly by DSS and alleged freezing of two state government accounts by EFCC spooked investors which result in a broad-based selloff that caused 2018 year to date market performance to be the worst ever since 1998.
Year to date performance for 2018 is currently around -7.49 percent and nearing the record of -10 percent witnessed in 1998 when Nigeria was in the process of moving from a military rule to a democratic government. According to data compiled from Bloomberg, in other pre-election years such as 2002, 2006, 2010 and 2014, the stock market rallied between January to August by 18 percent, 34 percent, 20 percent and 2 percent respectively.
Omotola Abimbola, Ecobank told BusinessDay that the selloff in the equity market this year is due to the heightened political uncertainty.
The tensed political climate in the country has driven down equity prices as investors are demand a higher risk premium to invest in this uncertain political environment. Analysts expect that the selloff may continue until after the elections next February.
In other pre-election years since 1998, the market selloff typically delays till the fourth quarter of the pre-election year. However, the ripple effect of the multiple changes in the political dynamics of the country has reached the stock market earlier than expected.
1998 and 2018 pre-election periods are clear evidence that investors dislike an unpredictable political environment.
The drastic slump in foreign buying amid boiling political tensions is at the heart of the stock sell-off and is likely to continue until after elections in 2019, according to Wale Okunrinboye, head of research at Sigma Pensions.
The 1998 pre-election period marked the worst performing stock market period in Nigeria so far. The stock market performance, measured by the All Share Index, fell by 10 percent from 6440.51 points in January to 5826.60 points in August. Market saw investors leave due to the uniqueness of the anticipated general elections. The 1999 elections was the first since the 1993 military coup and the first of the fourth Nigerian Republic.
In contrast to 1998 and 2018 pre-election periods, in 2002 before the 2003 general elections, the All Share Index grew by 18 percent from 10895.7 points in January to 12847.46 points in August, afterwards declined in the fourth quarter by 0.05 percent to close at 12137.72 points in December.
The Nigeria Stock Exchange (NSE) market witnessed similar trends in 2006, 2010 and 2014 pre-election years. In 2006, during the same period, the all share index grew by 34 percent from 24085.71 points in January to 32155.78 points in August and further grew by 3 percent to close the year at 33189.30 points.
In 2010 before the 2011 general elections, the market grew in performance by 20 percent from 20838.9 points in January to 25015.92 points in August before it decline insignificantly by 1 percent to reflect pre-election investor behaviour.
In 2014, the All Share Index grew by 2 percent from 41228.49 points in January to 42092.81 points in August thereafter declining significantly by 17.7 percent in the fourth quarter to close the year at 34657.15 points.
Despite improving macro-economic fundamentals and better earnings outlook for listed companies, valuations of counters on the exchange has continued to decline as investors shun emerging and frontier markets particularly Nigeria on the back of heightened political risks,” analysts at Lagos-based Cardinal Stone Partners said in a note to clients.
Still certain analysts believe that correlation between political tension and stock market performance is rather insignificant as the poor performance of the market is more of a global economic effect on the market.
Rafiq Raji, Chief Economist, Macroafricaintel opined that the poor performance of the Nigerian stock market is rather a reflection of the volatility experienced in emerging markets coupled with the slow macroeconomic performance of the economy which has caused investors to be cautious about their investment positions. He further asserted that taking these events in consideration with political cycles in the country; the sell-off is totally inevitable.
