Stock Market Records Inspiring Performance

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On the heels of the recent upsurge in trading activities on the floor of the Nigerian Stock Exchange, observers have begun to discuss the causes, wondering if it is sustainable, writes Olaseni Durojaiye

The excitement following the significant increase in trading activities on the Nigeria Stock Exchange, welcoming as it were, has also elicited discourse around what occasioned it. Opinion differs among economists, analysts and traders alike, some of whom have wondered how long the euphoria would last.

The run of increases at the bourse, which started in late April peaked last week when market capitalisation rose from N10,846 trillion to close at N11.262 trillion, while the All Share Index (ASI) recorded the daily highest gain in 23 months of 3.9 per cent to close at 32,578.38.

The continued surges, which were in both volume of traded shares and value have been traced to increasing investor confidence occasioned by the policy shift in the nation’s foreign exchange policy, particularly the foreign exchange window for investors and exporters and increasing receipts from the nation’s economic mainstay. One analyst added that it may not be unconnected to the return of Professor Yemi Osinbajo as acting president.

Even then, it is worthy of note that the surge is coming at a time when the money market sub-sector of the economy is witnessing higher yields on different instruments in the sector, leading some economist to predict that the bourse will perform even better if the interest rates in the money market is reviewed downwards. One analyst, however, disagreed.

In a bid to boost liquidity in the forex market, the CBN had introduced the window last April that allows market participants to determine the exchange rate of the naira on a willing buyer, willing seller basis. The CBN, however, added a caveat, which allows it to intervene in the market in order to promote liquidity and ethical market conduct.

Transactions under the new window include invisible transactions such as loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management service fees, consultancy fees, software subscription fees, technology transfer agreements, personal home remittances and any such other eligible transactions including “miscellaneous payments” as detailed under

Memorandum 15 of the CBN Foreign Exchange Manual. CBN, however, excluded international airlines ticket sales’ remittances.

Recent Gains

The Nigerian stock market, which has been described by analysts in recent days as one that is on steroids, sustained its rally last Monday, gaining N417 billion, its highest daily gain in two years, to cross the N11 trillion psychological barrier.

On the Nigerian bourse, market capitalisation rose from N10.845 trillion to close at N11.262 trillion, while the All-Share Index (ASI) recorded the daily highest gain in 23 months of 3.9 per cent to close at 32,578.38.

At the close of trading, year-to-date growth rose to 21.2 per cent.

Monday’s rally was bolstered by Dangote Cement Plc, which added N290 billion to its value to close at N3.578 trillion, accounting for about 69 per cent of the gains recorded in the market.

In all, Dangote Cement, which accounts for over 30 per cent of market capitalisation, has amassed N596 billion ($1.76 billion) in the first three trading days of June.

The company’s shares, which galloped from N175 at the close of business on May 31 to N210 Monday, have effectively made Africa’s richest man, Aliko Dangote, who owns 91 per cent of the shares in the cement giant, N518 billion ($1.6 billion) in just three trading days.

Further Breakdown

Even though the banking sector led, the positive run spread across the entire sectors as four of the sectors recorded price appreciation with the exception of the oil and gas sector that depreciated in value during the month.

The unprecedented bullish run pushed the Return-on-Investment, RoI, for the period to 14.5 per cent, higher than the year-to-date (ytd) return, which stood at 9.8 per cent. Market operators attributed the development to some positive macro-economic developments in the country and insisted that it was better than expected of the first quarter, 2017 (Q1’17) results even as some of them added that the return of Prof. Yemi Osinbajo as the Acting President helped to buoy activity in the market within the period.

Analysis of the stock market activities in the period showed that the banking sector topped others, appreciating by 26 per cent on the back of gains in top banking stocks like FBN Holdings Plc, Ecobank Transnational Incorporated, ETI, United Bank for Africa, UBA, Zenith Bank Plc and Guaranty Trust Bank Plc.

It was also observed that the passage of the Petroleum Industry Bill (PIB) by the National Assembly, in the later part of the month could not lift sentiment in the oil and gas sector as it lagged behind others, depreciating by 2.5 per cent. This, however, was an improvement compared to 5.4 per cent negative return recorded in the sector in the five month to end May, 2017.

The banking sector led, rising by 26 per cent on the back of 67.2 per cent, 37.5 per cent, 28.9 per cent, 27.7 per cent and 27.2 per cent increase in FBN Holdings Plc, ETI, UBA, Zenith Bank and GTBank respectively.

This was followed by the consumer goods sector, which rose by 19.1 per cent driven by activity in Nestle Nigeria Plc which rose by 20.4 per cent and GlaxoSmithKline that advanced by 20.7 per cent during the month. The insurance sector was the next with 11.9 per cent on account of impressive return on Axamansard Insurance and Law Union & Rock Insurance Plc which rose by 43.3 per cent and 30.7 per cent respectively. The industrial goods sector recorded 1.96 per cent return during the period.

However, losses in Seplat Petroleum Development Company and Mobil Oil Nigeria Plc that depreciated by 14.2 per cent and 14.3 percent respectively left the oil and gas sector with negative return of 2.5 per cent.

During the period still, the Purchasing Managers Index, PMI, rose to over 50 per cent indicating revival in private sector operation. Added to these is the gross domestic product (GDP) figure, which, though, contracted to 0.5 per cent in April, was a significant improvement against the two previous positions.

Analysts

Expectedly, operators, stakeholders and observers within and outside the financial services sector have been reacting to the development with some attempting to questioning the sustainability of the spike. Speaking with THISDAY, Director General of the Lagos Chamber of Commerce and Industry, Muda Yusuf, explained that the surge was as a result of review in the FX market, which tilted the balance towards a more market-driven policy.

Yusuf stated that, “I believe it is as a result of policy reviews in the FX market to allow for a more market-driven exchange rate, the benefits of that shift includes increased FX inflow whether as foreign direct investment or foreign portfolio investments. The introduction of the investor and exporter window in the FX market has particularly boosted investor confidence,” he stated.

Analysts at Cordros Capital Limited had weeks back said they sensed improved investors’ appetite for risk assets on the bourse, judging by market activity in the past three weeks, and more specifically the spike in the number of deals and the volume of shares traded penultimate week.

They linked the performance to reduced apprehension in the macroeconomic environment, impressive full year 2016 and 2017 quarter 1 results of highly capitalised companies as well as increased confidence and liquidity in the FX market.

Supporting this assessment, analysts at Afrinvest (W.A) had argued that foreign investors’ appetite for Nigerian assets had waned significantly on the back of the currency crisis, which in turn had fundamentally weakened macroeconomic environment, dragged corporate earnings, and impacted negatively on the equities market.

“However, in April, investor sentiment strengthened following the commencement of the Investors’ & Exporters’ FX window, which signalled a possible return of flexibility in forex rate determination, though multiplicity of rates at the official window is still a concern.

“Additionally, recent improvements in global oil prices above the $45/b mark, improvement in domestic production currently above 2.0mbpd, fiscal responsiveness – including the release of the EGRP, the successful issuance of US$1.5 billion Eurobond, passage of the 2017 budget, and improvement in the

manufacturing PMI, suggest a possible rebound in economic activities from Q2 2017,” they said.

Afrinvest explained that the NSE benchmark index recorded a decline on only two trading days since the launch of the FX window while appreciating 11.9 per cent post-launch, with YTD returns improving to 4.9 per cent last Friday.

On his part, a research analyst with the Nigeria Economic Summit Group, Rotimi Oyelere, explained that, “Two major factors drive capital market; the first is strong economic fundamentals and the second is market sentiments for profit taking or bargain hunting. No doubt, Nigeria economic fundamentals are solid even when the economy plunged

into recession. These strong fundamentals no doubt influence corporates/companies performance as seen in the Q1 report already submitted so far but in my view, the capital market is more driven by sentiments and profit taking opportunities. Foreign investors are profit scavengers, who bring in their capital when opportunities for arbitrage are solid and exit as soon as possible. Looking at it from another dimension, the recent growth is skewed, only few companies/equities, are driving the growth and not a through reflection of improvement in the macroeconomic environment and outlook,” he argued.

Sustainability

Amidst the euphoria, however, concerns bordering on the continuity of the surge drew divergent opinions from some of the respondents to THISDAY inquiries.

On his part, Yusuf maintained that, “It will continue as long as the policy remains intact and do not undermine investor confidence, whether by policy inconsistency or other means the surges will continue,” and argued that, “If the high interest rates in deposits, treasury bills and other money market instruments is reviewed the stock market will perform even better than it is doing now.”

But Oyelere held a contrary view. According to him, It really depends on how we define continuity. “If continuity means for the next couple of days, the equity gyration will continue but on a sustainable basis, let us say till the end of 2017, the burble will burst and market will reset again,” he stated.

Continuing, Oyelere added that, “The bargain hunting that is currently playing out is due to the fact that most stocks, in particular prime equities are trading below their book/intrinsic value. More so, the economy is still vulnerable to external shocks- oil price volatility and internal aggression from Niger Delta region. Even let get down to specific and try to answer fundamental questions with respect to firms/companies that are leading the price movement,” he stated.

Continuing, Oyelere further argued: “I do not see strong correlation between the money market performance and the stock market. The drivers also are quite dissimilar. Moreover, the high interest yield in the money market as we see at the moment is a signal of liquidity challenge to fund short-term cash demands. Now, banks and lenders are more active in the foreign exchange market, using naira to buy the greenback to meet customer request, but the drawback is that even businesses borrow naira to fund their dollar purchase. What I see is that the recent stability in exchange rate is influencing both markets through different channels, based on market expectation.” He maintained.

A stockbroker, Mr. David Andori, expressed confidence that the rally was sustainable, given the positive economic indicators. He told THISDAY that “When an economy is in recession, investors move from equities to fixed income securities and when the economy begins to recover, investors move back to the equities market. That is what we’re seeing now. Apart from the occasional profit taking that we may see, the positive trend will remain for a significant period of time,” Andori stated.

Analysts at FSDH research were in agreement with Andori. According to them, “Looking at the strong growth in the unaudited results that quoted companies released for the period January –March 2017 and the improvement in the macroeconomic environment, we believe the equity market is ready for a recovery for 2017.”