Equity investors suffer losses in Africa’s top 3 economies in January

Stock market in Africa’s top three economies fell considerably in the month of January which would have translated to billion dollar loses for many investors. While Africa has about 25 stock exchanges that vary in size, accessibility and market share, the exchanges of the top economies in the continent still remains the top draw.

Nigeria

The Nigerian Stock Exchange, NSE, for instance suffered the biggest loss in the top tier markets in the month of January. The NSE, All share Index (ASI) dropped by a whopping 15.7 percent in January, whipping away billions of dollars in investors’ asset sheet. The ASI which was 28, 370.32 points on January 4 dropped to 23, 916. 16 points on January 29, the last trading day of the month.   The Nigerian economy which has a nominal GDP of $568.508 billion  has been grappling with a couple of challenges such as falling revenues from crude oil, high youth unemployment rate,  dropping manufacturing output, while Boko Haram insurgency continues to  cripple economic activities in  some parts of the north eastern region of the country. Experts are not surprised that such would weigh heavily on the market. “The stock market is the barometer of the economy. Whenever the economy is doing well you should expect that the market will do well and vice-versa,” says Patrick Ajayi, financial analyst and the managing director, of Woodlands Capital Markets Plc.

Though the relatively new administration of President Muhammadu Buhari has taken a strong stance against corruption, the benefit of such might take a long time before it impacts both the Nigerian economy and the equity market.

South Africa

The South African equity market, which is the largest on the continent by capitalization, fared better than its Nigerian counterpart, experiencing a decline that was less than one percent in January. The Johannesburg Stock Exchange (JSE) All Share Index (ASI), which opened with 49,560.43 points on January 4, dropped to 49,141.94 on January 29, representing a decline of 0.84 percent. Such losses are considered marginal against the backdrop of the uncertainties affecting the global financial markets and the strain the South African economy, the second largest on the continent, has been experiencing. In the last month, the rand has declined against the dollar, inflationary pressures are going up, while the IMF last month, downgraded the growth forecast for South Africa to 0.7 percent this year. This would be the lowest level since a 2009 recession, and could make ratings agencies downgrade South Africa’s credit ratings to junk status. In spite of this, the market fell by 0.84 percent in January.

Egypt

Egypt, the third largest economy in Africa with a nominal GDP of $291.538 billion, saw its EGX 30 Index, decline by 5.97 percent in January.  The EGX 30, which is an index of the 30 most capitalized and liquid stocks traded on the Egyptian Stock Exchange (EGX), fell from 7089.06 on January 3 to 5992.72 on January 31.

Africa's top three economies

Declining commodity prices affecting equity Market

The Nigerian economy, whose equity markets fell considerably in January, has unhealthy dependence on crude oil, which contributes over 80 percent of its foreign exchange earnings.  As such, the economy and themarket are more prone to the vagaries of the global crude oil market, which has been on a steady decline since 2014. In one of the working papers of the International Monetary Fund (IMF), titled “Commodity Price Shocks and FinancialSector Fragility” the paper acknowledges a link between commodity price shocks and financial sector fragility. “Adverse commodity price shocks can also contribute to financial fragility through various channels. First a decline in commodity prices in commodity-dependent countries results in reduced export income, which could adversely impact economic activity and agents,” the paper noted.

Financial analyst, Ajayi also points out the relationship between declining commodity prices and the equity market. “Drop in the prices of oil will affect the foreign exchange earnings and reserves of countries that depend substantially on it for revenue. When a country’s reserve is dropping, foreign investors know that the country would have to devaluate its currency. Hence they will try to get out of such economy before it devalues its currency to avoid substantial losses,” he said.

While the Nigerian, and  to some extent, the Egyptian economy seem to depend on one or two products, the South African economy is more diversified, with a robust industrial base, which may explain why the equity market decline in the country was marginal in the review period, as compared to both Nigerian and Egyptian.

This means that on the average, investors in South African equity market was better off than the Nigerian and Egyptian equity markets in January.