Skip to main content

I Fear a Recession But I Hope for a Recovery

Dear Speculators,

We just began the 3rd quarter of the year and we are delighted to see that some of our predictions for this quarter has already come to fruition (You can read up our previous articles and check our forecasts). The market is up about 15% since the beginning of the second quarter, banks stocks generally have rallied significantly with some of the best performers like GTBank jumping about 60%, First Bank and Access Bank both increasing about 25% in value within the last 3 months. Crude oil prices is now hovering around $50 but sadly Nigeria has been unable to profit a lot because of the fall in our crude oil production levels due to security challenges in the Niger Delta.

However, the general economy has not performed as well as the stock market. For the first time since the second quarter of 2004, the Nigerian economy contracted, and another negative growth in the economic output of the country will put Nigeria in a recession. We all know the saying, "You never know you are in a recession till you are out of it," well we just might have endured a recession in the last quarter and we await Nigeria Bureau of Statistics to give us the exact estimates on Q2. Hopefully I am wrong about the recession and we may see that the economy grew almost 1% since the last quarter, but it will be careless to wave away the possibility of a recession because of the stringent foreign exchange controls, fuel scarcity, electricity issues and a loss of up to 700,000 barrels of crude oil daily in the Nigeria Delta which have all had very negative impacts on the economy.

Going into the announcement by NBS, if Nigeria indeed is in a recession, we are likely to see a sell off in equities and a rally in government bond prices. Investors will likely want to reduce exposure to the economic cycle so they will most likely start positioning huge chunks of capital in anti-cyclical stocks and federal government bonds. This could mean a reversal of all the gains made by the market Year-to-date and even on a quarter by quarter basis. A recession also leads to higher unemployment, lower wages for employees and lower corporate earnings which we are already experiencing. We applaud the CBN for finally choosing to float the naira but this policy may be too little too late to save Nigeria from the imminent economic recession.

Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
emekaucheaga@gmail.com

Comments

Post a Comment

Popular posts from this blog

The Wrong Forecaster

Dear Speculators, The gloominess of the Nigerian economic outlook has significantly knocked down the prices of some financial assets but the real value of some of these assets have been mildly affected. While recounting the economic misfortune that has befallen the country in the last two years is inevitable, dwelling on the past is a perfect time wasting activity. Luckily, investment is forward looking and not regressive thinking. The past is a great indication of the future but not a mirror for prediction. The randomness of the world ensures that yesterday looks at least slightly different from tomorrow. And if we have learnt anything from the history books, it is that good things do not last forever and bad times always have an end. Life is by definition cyclical. The key questions to ask before buying or selling any financial asset is; will the current economic situation last forever? Will the inflation rate remain in double digits over the next 5 years? Will the Nai...
Post a Comment
Read more

It's a Dip not a Bear

Despite strong economic fundamentals and fairly optimistic market sentiments that have driven stock market prices in the past year and even stronger since the start of 2018, stock markets all around the world are witnessing an unexplained coordinated price descent in the past one week. Asides the biggest bitcoin price crash in years, now 66% lower than its record high price of $19,500 in December, nothing out of the ordinary has occurred. Yes, stock prices are at the highest it's been in since pre-crisis era in U.S and the market is due for a price correction but then how do we explain market dips in relatively cheap emerging markets? Something is amiss! As Central Bankers around the world have begun to discuss monetary tightening in a coordinated fashion as the quest for 2% inflation seems more achievable this year due to strong global economic and rising commodity prices, bond prices have dropped precipitously and the U.S 10 year Treasury bills risen above 2.5% a...
Post a Comment
Read more

Everything is Going Down in Nigeria Except Inflation

Dear Speculators, The wait is over, we anticipated bad news and we got it. Our fears have become reality, the economy has continued to back slide and Nigeria has officially tipped into a recession. Not that this surprises anyone though. Falling oil prices, dollar scarcity, exploding oil pipelines, massive labour retrenchment and import restrictions have all contributed their fair share to weaken growth in Nigeria's economy. However, the stock market arguably has had it worse than the general economy this year as the market is currently down about 3.8 percent against an economy contraction of 2.06 percent in the second quarter. A closer analysis of the stock market brings to light some intriguing statistics. The largest 49 companies in the stock market account for 97% of the total stock market capitalization. 41 companies of the 49 sell at an average of 22x earnings. Only 49 companies out of a total of 171 companies trading on the Nigerian Stock Exchange are valued above ...
Post a Comment
Read more