33.2 C
Wednesday, March 29, 2023

Rising GDP Not Always a Boon for Equities

Must read

- Advertisement -
- Advertisement -

The relationship between economic growth and stock market returns is paradoxical and critically nebulous in Nigeria.

Of course, scholars and investors have unanimously agreed that rising GDP is not always a boon for equities.

Intrinsically, one might think that the current growth in economic output in Nigeria will feed through the providers of capital and the general population.

Standard economic theory suggests that, when stocks are in a rising trend-a bull market- there tends to be a great deal of optimism about the economy and prospect of various stocks.

It is logical because if companies issue new shares or raise bonds or borrow from the capital market to fund future expansion plans, they employ more people, and that propels business activities.

The Nigerian Stock Exchange Index (NGSEINDX) has negative year to date (YTD) returns of 5.11 percent as the equity market has continued on a downward trend.

However, the economy grew 0.5 percent in the first quarter, lifted by higher crude production and oil prices, as activities slowly gained momentum after the gradual easing of coronavirus lockdowns.

In fact, the country exited its fourth recession in 4 years in the last quarter of 2020, mainly driven by contribution from the non-oil sector such as Agric and telecommunications.

There have been massive sell-offs by investors who fear they will lose significant investment to lack of transformation policy on the part of the policy markets.

For instance, the inability of the central bank to devalue the currency on time and its orthodox capital controls such as the ban on some 41 items from its foreign exchange window sent a predawn chill down the spine of foreign investors and hamstrung foreign direct investment.

But the bearish market was also elicited by the unexpected rotation from equities to bonds at the start of 2020 as yields on fixed income securities which were depressed last year have been on an upward trajectory amid strong demand for higher yields and the need to attract foreign interest in Nigeria equities amid dollar shortage.

It is worthy to note that corporate earnings have been impressive from the first quarter results released so far, but the banks are grappling with a punitive regulatory environment that has cast a pall over future earnings growth.

With the relaxation of the lockdown measures imposed to curb the spread of the disease and stimulus package by the government to mitigate the impact of the pandemic, companies exited a recession.

The thirty most capitalized and liquid firms otherwise known as “Nigerian Stock Exchange (NSE) 30 saw combined net income spike by 35.13 percent to N695 billion in March 2021 from N514.86 billion as at March 2020, according to data gathered by MoneyCentral.

There has been academic research by professors of finance on whether economic growth benefits stockholders.

But it is glaringly obvious that investor sentiments and confidence is a major driver of GDP growth, whether they have a conviction that policy makers will create an enabling environment for businesses to thrive.

With heightened insecurity, rising unemployment, infrastructure bottleneck, foreign exchange challenges, and inflationary pressures, the country could plunge back into recession.

Who knows? The stock market could be in bearish territory, after all anything can happen in the investment world.

- Advertisement -
- Advertisement -

More articles


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

- Advertisement -

Latest article