As Investors Flee Nigeria, the Discerning Dive In

Conventional wisdom holds that when you have a general election in Nigeria, it’s time for investors there to flee to safety from imminent political risk. But the reality is that the more discerning have made huge profits over the years by diving in when most have left.

Tracking the performance of the Nigeria Stock Exchange through four elections, it is evident that they made the right decisions. A review of the all-share index, the key measure of market performance, from 2002 through 2017, does clearly establish a pattern of post-election spikes that hugely benefited those who bought when the market was deserted.

For the purpose of this article, we’re looking at data starting from the year before the election to the end of the year following the election. In 2002 the all-share index, which started from a base of 100 points in January 1984, had a daily average of 11,665.10 points. In the first 10 months of this year, 16 years later, the average reading was 38,732.23, just to give an idea of where we’re coming from.

In January 2002, more than a year before the next general election was due, the index had an average of 10,895.10 points, reaching 11,607.30 in December, just ahead of the February-March 2003 election season. With the elections done, the impact was immediate as the monthly average surged to 13,605.26 in March before reaching a peak of 21,131.38 on November 19. Investments that moved in in step with the index would’ve almost doubled in value in the 11 months from December 2002 to November 2003.

Average Yearly Index
Graph shows average yearly index for the Nigeria Stock Exchange from Jan. 2002 to Oct. 2018.

The scenario wasn’t too different during the next election cycle in 2007, when the vote held in April. In January 2006, the index was at an average of 24,085.71, rising to 32,689.20 in December. With the presidential election concluded by the middle of April, bullish sentiments overwhelmed the market as the index jumped to 44 percent in four months to 47,124.14 by April 27. On the last trading day of 2007, the market closed at 57,990.22, gaining 77.4 percent year-on-year.

The 2008 Financial Crisis

On March 5, 2008, the Nigerian index reached a record peak of 66,371.20. Market growth had been substantially driven by a banking consolidation prompted by the central bank a couple of years before by raising the minimum capital requirement for banks. This sparked a wave of mergers, acquisitions and initial public offerings at a time Nigeria had seen an economic boom prompted by higher prices for oil, its main export.

It was about this time that the 2008 global financial crisis set in. What followed was a rapid market plunge that persisted over the next year, reaching as low as 19,858.96 by April 14, 2009, as investors, both local and foreign, fled the rout. Yet, the next Nigerian elections that came in 2011 didn’t fail to provide, once more, a significant profitable opportunity.

As at January 2010, the index began the year at 20,838.90, and went on to close the year just 18 percent higher than it began it at 24,770 on the last trading day of the year. The first quarter of 2011 was a period of volatility amid election jitters. With the end of the vote in April, the market experienced a sudden spike, rising to 25,995.54 by June 2, before decline set in. Other factors had been at work to stymy the traditional post-election surge. Nigeria was about this time overtaken by a banking sector crisis that saw the central bank taking over four failing banks, injecting about $4 billion to shore up the financial system and creating the Asset Management Corporation of Nigeria, or Amcon, to take over the non-performing loans of the banks.

Many of these problem funds were related to fuel import deals, done at a time of high oil prices, that became unsustainable as prices collapsed.  There were also so-called margin loans taken to invest in shares that saw their value wiped out as the markets collapsed. In many ways it was still the aftershocks of the 2008 crisis being felt in the Nigerian market, with many badly burnt retail investors staying away and foreigners watching the bearish turn of events from the sidelines.

However, the four years in between the 2011 vote and the next one in 2015 provided some time for a fair amount of market recovery. On the first trading day of 2014 the market index had reached 41,450.48 after waves of surges on the back of relative economic stability. But by the end of the year, as people added the following year’s election risks into their calculations, the gains tapered to 34,657.15 by the last trading day.

The decline continued in the new year, reaching  27,585.26 on February 13, the lowest index point before the elections. With the vote concluded in March, positive sentiments returned to the market immediately. In the seven weeks between that February low and April 2, 2015, the Nigerian index gained 29.5 percent to touch 35,728.12 points.


A Gilt-Edged Performer

To illustrate how these index gains translate to investor profits, we decided to track the performance of one of the Lagos exchange’s gilt-edged stocks, Nigerian Breweries Plc, through this period. Majority-owned by Heineken BV of the Netherlands, it has existed for more than 70 years and provided some of the best returns in the market over time.

In January 2002, NB Plc sold between 7-8 naira per share, before reaching a low of 6.93 naira on June 7. By the end of the year, it had doubled the price by ending the year at 15.50 naira per share. The price mostly treaded water during the election and the period following immediately, with a price of 16.95 naira as of June 30, 2003. Subsequently, from that day to the end of the year, the stock surged 86 percent in value to close at 31.60 naira.

NB Plc's Average Yearly Close

Approaching the 2007 elections, NB had started the preceding year with losses, dropping to a quarterly low of 30.02 naira a share on March 29, 2006. From there it shot up to a peak of 49.30 naira by August 18 before sliding down to 33.05 naira at the end of November. A period of volatility followed as the election season took over from then until April 2007. From a price of 33.60 naira on May 10, NB made steady gains, reaching 51.90 naira by November 22, 2007, a post-election gain of 55 percent.

In January 2010, more than one year to go before the 2011 elections, NB opened the year with a price of 53.02. It rose 45 percent through the year to 77.10 naira per share on December 30, the last trading day of the year. In 2011, the stock started the year at 79.05 before dropping to 72.50 on March 10, while the elections were underway. With the successful conclusion of the vote, the share price of NB jumped 52 percent in the post-election rally, to reach a peak of 110.10 naira by December 23, 2011.

The year 2014 opened with NB at 167.90 on the first trading day, surging to a peak of 186.90 by August 7. Then decline set in as the election season drew closer, reaching 128 naira on February 16. Following the peaceful conclusion of the vote in March, the NB share price leaped as if it propelled by a spring. From a price of 131.50 per share on March 23, it jumped 31 percent in three weeks to 172 naira on April 14.

Another Opportunity

Ahead of the 2019 elections, in which President Muhammadu Buhari is seeking a second term and is facing former Vice President Atiku Abubakar as his main challenger out of some 70 contestants. As is the tradition, investors have been fleeing from the Nigerian stock market, even starting earlier than usual, with bearish sentiments well established by the end of the first quarter of this year. Between January and October 22, investors lost 1.5 trillion ($4.1 billion) in the Nigerian Stock Exchange, with foreign portfolio inflows dropping 56 percent in the year through September. The decline is likely to get worse as the countdown to the election day shrinks to weeks and days.

For the bargain hunter, these coming weeks and days provide the best opportunity to strike. For instance, NB Plc has traded in the range of 80 naira-84 naira between October and November, down from the year’s peak of 152.68 naira on January 11. The situation is comparable across the leading blue-chip stocks such as Nestle, Dangote Cement, Guaranty Trust Bank, First Bank, Stanbic IBTC, Total and Forte Oil, to name a few. So take our advice this time, dive in when others are scampering away, then send us a thank you note when you start scooping up the profits!

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