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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

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