Johnson Chukwu is the Managing Director/CEO of Cowry Asset Management, a Lagos-based investment banking firm. In this interview with Financial Vanguard, he spoke on the state of the equities market arguing that poor performance in the secondary equities market is contributing to dull activity in the primary market. Excerpt:
By Nkiruka Nnorom
After ranking the third best performing stock exchange in the world in 2017, the Nigerian Stock Exchange, NSE, is currently under-performing major stock exchanges in Africa. Where do you see the NSE in terms of returns this year given that the market is already down by 7.6 percent?
I think the market, at best, will close neutral, but it is likely going to close some points below positive in the negative territory at the end of the year. To situate the market performance appropriately, remember in 2016, the economy was in recession; in 2017, it exited recession. So, investors responded to the exit and began to take position in equities. The other factor that contributed was the introduction of a new investment guideline by the Pension Commission, PenCom, which spurred investment in equities by Pension Fund Administrators.
The third factor, which was the introduction of Investors & Exporters, I&E foreign exchange window in March last year encouraged a lot of foreign portfolio investors to invest in the market in 2017. Contrast that to 2018 when the country entered into a pre-term political situation; we saw the onset of political activities much earlier than was predicted. The earlier part of the year witnessed a lot rumbling in the ruling party, which scared foreign investors away from the market. So, 2018 is completely different from 2017 because 2018 is almost an election year because it precedes a national election with a lot attention now focused on political activities, leading to heightened political risk, which investors are shying away from.
That is why also the equities market has not done well in 2018 and may not necessarily close in the positive. So, it has to do with political risk in addition to some economic factors such as the normalisation of interest rate in the United States of America, the increase in yield in the United Kingdom and even the normalisation of monetary policy by the European central bank and Japanese central bank. These are some of the contributing factors, but the major constrictive factor is the deteriorating political environment.
A look at leading stock exchanges in Africa as at August 22nd shows that Nigeria is under-performing the other exchanges. Ghana Stock Exchange for instance is up 11 percent; Nairobi Stock Exchange is up two percent, Egyptian Exchange 1.7 percent, while Johannesburg Stock Exchange is down three percent. Do, you think Nigeria can surpass any of these exchanges by the end of this year?
As I said earlier, we have constrictive factors and contributing factors. The major constrictive factor that has led to weak performance of the Nigeria equities market is the political situation. None of these countries you mentioned is actually going through a national election this year, which is why we are seeing much better performance in some of these exchanges. This is the reason I said that the major problem we have is not the normalisation of monetary policies in the western countries. Yes, it is a contributing factor, but the major problem we have is the political environment. Politics is local. So, for that reason, I do not see the market closing in the positive.
At best, we will see a neutral performance, but the market will recover next year after the election. So, you cannot really compare the performance of the Nigeria’s equities market with either Egypt or Ghana this year because Nigeria is facing a national election that draws resources away from every other thing. Also, at periods of uncertainty, investors do not invest in variable assets and that is where we are today as a country. Our economic fundamentals are as strong as any of the countries you mentioned but our political outlook is clouded and until that is resolved – which will be after the election – investors are not going to be bullish with Nigeria’s variable instruments.
This year, Notore Chemical Industries Plc has taken the lead in listing on the stock market and is planning an Initial Public Offer as well. Do you see more companies following suit?
The primary market will only be vibrant when there is a vibrant secondary market. If the secondary market is reporting negative All Share Index, ASI, issuers are not likely going to be bullish in listing their shares because what happens is that when they list their shares, there are couple of concerns. One of it is that the market might not take up the shares. Another thing is that the market might under-price those shares and no investor will want to come to the market to discount their shares at the onset of their initial listing. So, at periods when the secondary market is not strong, the primary market will also be weak. Therefore, until the secondary market recovers, I do not imagine a lot more listing on the exchange.