Equities market looking for direction

The equities market is presently looking for direction that isn’t likely to be found soon. Nothing new is anticipated from the government that is marking time toward leaving office in six weeks time. Neither can significant changes be expected yet from the in-coming administration that could take months to settle down.

Operating difficulties can be expected to continue to constrain corporate earnings, ruling out any positive developments big enough to spur investor confidence. The market is therefore expected to be flat at best for most of the second quarter. Traders are likely to continue to seek and act on profit taking opportunities, which will keep the market on a consolidating mood for a while.

The market nevertheless has potential optimism that could be activated under the in-coming government. This is based on the hopes of foreign investors as well as Nigerians that the government in waiting would curtail corruption and divert otherwise lost resources to economic development. A violence free election and a smooth hand over are the vital ingredients expected to spur increased foreign portfolio inflow.

Despite a significant pull back ahead of the elections, foreign portfolio investors still account for a dominant proportion of the equities market here. There is a good chance that this could increase further in the post election trading, as local investors aren’t likely to rebuild lost capacity for yet a while.

The caution however will be the inability to predict the economic policy direction of the in-coming government, in which the former military general, who will head the next government, will have to engage a learning curve on the dos and don’ts of democracy. His concerns about the low exchange value of the naira during his electoral campaigns will definitely warrant a wait and see posture in the financial markets. Traders will have to try to convince themselves that policies likely to set financial markets astir aren’t in the making.

In order to reinforce confidence in the stock market, listed companies will need to rebuild broken capacities, raise sales volume substantially to absorb rising cost and achieve accelerated growth in profit. All these cannot happen as long as consumer spending capacity remains low, interest rate stays roof high and output and employment remain stifled by the cash and credit crunch facing both producers and consumers alike.

The economy clearly needs considerable monetary stimulus to grease the productive engines and also increase the ability to consume what is produced. This will however constrain the Central Bank’s ability to achieve exchange rate stability. There are far more expectations of the in-coming government than available options for it to engineer the dramatic improvement and quick fixes being hoped for at various levels of the economy.

The unfolding scenario is likely to leave traders and investors in the equities market uncertain about the direction of the market and the economy for quite a while. The market last week saw a mild recovery, which is nothing close to the preceding week’s loss of 2.2% in the all-share index. The up and down trending is likely to continue until a clear direction of the economy can be discerned. The index closed 723.07 point or 2% down from the opening figure for the month of April but is marginally above the year’s opening.