Stocks on path to historical sell-off before elections

General elections due in 2019, and a slight buildup of pressure against the currency (naira) should push Nigerian equities lower in the second half (H2) of the year if history is anything to go by.
The stock market is up just 1.79 percent year to date. This performance pales against the market performance of 16 percent in the first half of 2017.
Stocks peaked this year at 45,092.83 points on January 19, and have since suffered a correction of -13.67 percent to close at 38,928.47 points on the last trading day of Thursday June 14th.
The slower performance in H1 2018 could be explained by profit taking by large institutional and retail investors who enjoyed a brilliant year in 2017 when equities rallied 42 percent.
A deep dive into historical market performance in the year prior to a general election in Nigeria show that investors are justified by pulling funds out of the market early in the first half of the year, preceding elections.
Typically what is usually seen in the equity market is that the first half of years preceding an election experience positive returns, whereas the second half (H2) sees a negative return with the exception of the year 2006 whose performance rose higher from 9.26 percent in H1 to 26.12 percent in H2.
Although, this performance could be because the year 2006 was a boom market for global equities as the bubble neared its peak levels.
In 2002, the year preceding the re-election of President Olusegun Obasanjo, equities jumped 13.48 percent in H1 2002 but stock returns turned negative to -2.44 percent as investors sought to reduce their market exposure when the elections drew closer.
The strong H1 performance though ensured that the market closed the year on a positive note, with the broad measure of market performance the NSE all share index (ASI) rising 10.71 percent in 2002. Still full year equity returns were significantly lower than it managed to achieve in 2001, where the ASI rallied 35 percent.
In 2010 (a year before the general elections of 2011 that brought President Goodluck Jonathan to power), the equity markets had stellar returns of 21.88 percent in the first half of the year, but the bulls gave way for the bears in the second half of the year as H2 equity return was down -2.42 percent. Although, the stronger performance of the first half of the year ensured that the market enjoyed capital gains of up to 19 percent at the end of the year.
This was an improvement from the -34 percent market return in 2009 and marked the beginning of the stock cycle after the crash of 2008. The period 2014 (a year before the 2015 general elections) started with a low stock return of 2.79 percent in the first half of the year as tensions built up toward the upcoming election and it only became worse as the equity market saw a large bearish market resulting in a negative return reported in the second half of the year of -8.42 percent and the NSE ASI reported a -16.1 percent drop by year end.
The year 2017 saw a great performance buoyed by bargain hunting and bullish market expectation. Stock prices rose sharply as investors raced to take advantage of the low market valuation.
The bullish run of last year has since faded in 2018 as investors’ sentiments are now even more bearish than they were in 2016 as can be seen from the recent selloff in the equity market.
Robert Omotunde, the head of Research in Afrinvest opines that although he expects Half year, 2018 earnings to be decent, he does not think firm’s financial performance would significantly drive equity prices higher. This is because investors will be very cautious as the general elections draw closer.
“Unless there is a significant policy shock, equity market will close the market positive but significantly lower than their performance in 2017,” Omotunde said. Afrinvest is also in the process of revising their year-end expectation of 18 percent market gains downwards.
If history repeats itself, the equity market may not the best for short term investors to be deploying funds today as equities typically perform poorly months before the general election in Nigeria. Analysts opine that the market selloff is largely caused by foreign investors who are gradually pulling their funds out of the local bourse as the election draws closer. Equities are highly volatile during periods of rising political uncertainty.
Foreign investors are repatriating profits out of the tensed political environment in Nigeria to invest in safer haven assets in USA where treasury yields are higher than they were a year ago.
The S&P 500 is currently up 3.94 percent while NASDAQ is up 10.94 percent year to date versus the NSE ASI performance of just 1.79 percent year to date.
“Going into the rest of the year, the duo of policy normalisation in advanced markets and election uncertainties in Nigeria could potentially create foreign investors’ aversion towards naira assets and, by extension, reduce capital importation into Nigeria.
Already in May, we saw some pressure at the I&E FX Window largely due to a slowdown in Foreign Portfolio Inflow with the equities market returning -7.7% MoM while average yields in the fixed income market expanded 31bps MoM in May,” ARM research analysts said in a June macro-economic update.

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