In less than a month, Nigerians will be going to the polls to elect a new leadership both in the executive and legislative arms of government. The pre and post-election influence on the stock market will definitely be significant. In the main, foreign investors will, at this point, be very careful in investing in the Nigerian market. This, consequently, may affect the size of our foreign direct investment (FDI) one way or the other. The greatest fear of investors is the possibility of changes in policy by the incoming government-whoever wins eventually!
In the stock market, the world over, stock prices fluctuate every other time even with blue chip companies whose investments are understood to be more secured and surer. Investors often wonder and try to ascertain the factors that affect the prices of stocks.
Already, the year 2018 was not so rosy for the capital market and the Nigerian Stock Exchange (NSE) as its crucial indicators depreciated by 19.77 per cent due to uncertainties surrounding the forthcoming general elections1. The same platform reports that a breakdown of the foreign investment outflow from the exchange between the first (Q1) and third (3rd) quarters of 2018 showed that a total of N513.49 billion left the country during that period. This amounted to an embarrassing 63 % increase in total outflow compared with N315.04 billion withdrawn in the same period in 2017. This trend may not be unconnected with the uncertainties surrounding the forth coming general elections.
How more can we explain the negative trend in the market if not to link same to the forth coming elections. The All-Share Index opened trading in 2018 at 38, 243.19, but surprisingly an amazing 6, 812.69 points or 17.81 per cent was shed to close at 31, 430.50, eroding over 43 per cent growth posted in 20172. The desultory performance of the market is directly linked to the jittery of investors with regards to the uncertainties surrounding the forth coming general elections and the slow recovery pace of the economy.
Reviewing the trends, it would be observed that similar patterns occurred in the build up to the 2015 general elections. In 2014 the market recorded a -4.27% (Year-To-Date (YTD) loss, clearly showing the level of uncertainties ahead of the 2015 elections.
Also taking a clue from the trends in Kenya. In 2017, following the row that succeeded the presidential election, the Supreme Court ordered a re-run of the election. This singular pronouncement sent shock waves through the spines of the Nairobi Securities Exchange and as a result, trading halted for about half an hour after the NSE 20 Share Index – which covers the country's largest and most heavily-traded companies – declined by more than 5 %3.
Basic micro economics postulates that prices of commodities are regulated by the demand and supply interactions in the market place. Every investor and operator in the money market wants to know what the earnings per share (EPS) and the interest rates respectively, and how secured his investments would be before he invests in stocks and lend out money for capital re-investment. The EPS rates, to a large extent, affects the prices of shares just as the interest rates affect the EPS.
Aside the investment scare that precedes an election year, the investors also try to allay the fears of a wasted investments by critically examining all the factors that may affect such investments. When shares are purchased by an investor, it gives the investor an access to future earnings on a proportional basis. When at the end of the regular period the earnings are brought together, part of these earnings is, where declared, shared to shareholders as dividend while the remainder is retained by the company and ploughed back as capital for reinvestment. In properly construing future earning streams, same is construed as a function of both the current level of earning base.
This uncertainty also has a great toll on those in need of funds and resources to carryout business. Accessing capital has always been a challenge in Africa for Small and medium scale enterprises. This is as a result of the fears of the loans eventually becoming bad arising from the failure of the lenders to pay back the loans. This trend most often gets compounded during election periods due to all round uncertainties. Just recently, on January 25, 2019, the president of Nigeria, suspended the Chief Justice of Nigeria. This singular move sent shock waves through the spines of the bar and the bench. Its telling on investors confidence will obviously not be in doubt. There will be the feeling of uncertainty amongst the investors who would have reposed confidence in the courts for the resolution of trade disputes. The general understanding will then be that the judiciary is entirely under the whims and caprices of the executive arm.
Furthermore, in the electioneering period, the central bank of Nigeria may decide to raise or reduce the interest rates to stabilize the Nigerian economy. If a company, blue-chip or not, in search of capital, borrows money to improve its business and expand its capital base, higher interest rates will certainly affect the cost of its debt where the rates are increased. As the cost of debt increases, this alone can reduce the profits and dividends to be gotten by the investors. This explains the reason why in higher interest regimes, investments that pay interest tends to attract more investors than those that pay dividends. As at the last quarter of 2018, few months to the 2019 general elections, the central bank of Nigeria left its official interest rate bench mark unchanged at 14% as widely projected by market analysts4. Where the interest rates are very high, this affects the cost of accessing capital generally.
The general political cum economic outlook is another key influencing factor. When investors perceive that the economy may expand due to the economic blueprints and policies been put forward by a candidate that has a real likelihood of emerging victorious at the polls, stock prices may rise as investors will be more than ever willing to buy shares on the understanding that returns on such investments will be certain. Where the economic outlook is gloomy, investors may not be willing to invest in stocks and may even begin to sell off their shares and then the market forces of demand and supply sets in.
Stock market crashes are, more often than not, driven by investors panic as well as other underlying factors like economic and political uncertainty such as the forth coming 2019 general elections in Nigeria which may be heralded with significant changes in policy. When investors loose confidence in the market, it can lead to a significant and frightening sale of stocks in the stock market and a resultant drop in prices. It is important for investors to realize that with the internationalization of the stock market and the emergence of electronic systems, crashes can now spread rapidly across the globe which can magnify the collapse of the market.
In conclusion, while there are numerous factors that affect the behavior of the capital market, changes in policy and political tensions, unrests and uncertainties are very common influences in the market structure. The impact that the emergence of a new government structure would have on the market can be seen from the light of the changes in policies and ideologies and even to changes in interest rates. A new government may also come up with tax structures which may not be investors friendly. The resultant effect is the impact, either positive or negative, that it will have on the market. Investors will therefore have to be observant and prudently speculative in their investments particularly in this electioneering period.
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