By Chinenye Anuforo and Chinwendu Obienyi
Economic recession is a period of general economic decline and is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. Generally, a recession is less severe than a depression.
Recession becomes visible through the decline of all major macroeconomic indicators: GDP (Gross Domestic Products) slow down in growth or becomes negative in production, investment spending, household incomes and spending while bankruptcies and the unemployment rate rise.
Statistics from the nation’s bourse has shown that demand for stocks has declined considerably since the recession started. Precisely, investors in the nation’s stock market have lost over N14 billion of their investment value since the recession hit the financial market.
The Nigerian Stock Exchange (NSE) market capitalisation, which represents the value of total investment in the stock market by investors, had dropped to N14.16 billion from N9.478 trillion it closed on August 31, 2016, (the day the Federal Government officially confirmed the country has entered into recession) to N9.464 trillion on October 18, 2016, the day this report was filed in.
Speaking on the stock market performance since the recession started, Mr. David Adonri, Chief Executive Officer of High Cap Securities, said that prices have declined across the entire market.
He said: “The listed companies are not performing as badly as prices suggest. Therefore, opportunities for bargain-hunting exist for investors who have money to enter the market now. However, the situation is not conducive for equity issuers to access the market.”
The Chief Executive Officer, Cowry Asset Limited, Johnson Chukwu also argued that the volume of transaction has gone down in the stock market and prices have relatively remained stable.
He noted that prices are already too low and that the investors that hold the shares are not willing to sell at those prices. “Those that want to buy do not have enough money to buy and that is why we are seeing a downbeat in the volume of transaction,” he said.
In the primary market, we are actually not seeing any activity and in the equity segment, there is no new offer neither rights issue nor public offer. In the bond segment of the market, because of high interest rate applicable at the short end of the market, issuers are not willing to come and borrow money at such a high rate and again investors, apart from the pension fund, do not have the resources to actually lock in long term instrument. So you see a major lull in activities of the capital market.”
On what should to be done to drive activities in the market, Mr. Chukwu said: “The investors do not have money. The economic outlook is weak so you find out that the solution to the problem is to address the environmental issues to make the market economy become attractive. So, the economy will have to reverse recession to a rebound. The security must be gotten back to the economy, local currency security must come back to the economy so that in relation to have access funding, the outlook will be optimistic. So, stimulations will have to happen at the macroeconomic level and then trickle down to the sub-segment of the capital market.”
Mr. Robert Omotunde, senior analyst with Afrinvest Securities Limited, explained that in a recessionary period the economy is characterized with low activities and people’s income is also quite low. “Not just that, the peculiar thing about Nigeria is that the recession is also plagued with what you can call general rise in price level. This invariably affects the purchasing power of an individual. In this period also, a lot of people are out of job and all of these affect the personal income of people who are supposed to invest in the market and you know you cannot participate in the capital market except you have some savings because investing in the capital market is a form of savings.
“So, what is being experienced currently is the fact that we have stagflation. Stagflation is a period of rising unemployment, high rate of inflation characterized with slow economic activity. The combination of these three won’t support funds that will be directed towards the capital market which is the basic reason why investing in the stock market may be under pressure,” Omotunde said.
Continuing, he noted that the stock market is a barometer for measuring performance of the economy. “So, what you see at the floor of the stock market is a reflection of the state of the economy. If the economy is not doing well, the only thing that can revamp the stock market is if the economy does well, what will necessarily need to be done is to see the turnaround in economy activities”, the analyst said.
Also, the Doyen of the capital market, Mr. Rasheed Yusuf stated that recession is affecting every sector of the economy not just the capital market. He said activities in the stock market are low, and there are now reduced persons trading in the capital market which has led to reduction in the volume of business.
On what needed to be done to drive activity in the market, he said: “When there is an economic correction going on, it takes time. Every Nigerian is thinking that there should be a magic formula somewhere but the truth is that it takes time. The basic thing is for the government policies to be directed towards local production and that will lead to the expansion of the economy and it will manifest in the purchase of capital market instruments. And so, the whole thing is tied to the same economic problem, if the economy is revived and the companies are doing well, then there will be incentive for people to come back to the market and use their savings to buy shares.
Yusuf explained that, it is important to encourage local companies to thrive so that the economy can have stronger local participation and then have stronger local investors too.
“All of us depend heavily on foreign investors. That is a lesson everybody should learn. We should not leave our economy to foreign investors. We should not leave our investments to foreign investors. We should have very strong local investors directing our economy. So at a time like this, the local investor will be happy but that is not what we have now and that is what we are suffering from. So we have to readjust. We hope the time of adjustment is what the government can quicken up,” the Doyen said.