Having recorded a growth of 23.2 in the first half of the year, the stock market is on its way to a positive close after three consecutive years of decline, writes Goddy Egene
When the stock market declined 6.17 per cent in 2016, the third consecutive year of such a negative performance, most stakeholders believed that the market would recover in 2017. What they could not be sure of was the margin of positive growth the market would record at the end of the year. However, many noted that the recovery would begin to manifest better as from the second half of the year.
NSE’s optimism
The Chief Exchange Officer of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema was one of those who have been very confident that the market would recover at the end of the year.
According to Onyema, the capital market is a subsector of the Nigerian economy and the World Bank had projected that the economy would recover from its recession this year with a modest growth of 0.6 per cent.
He therefore said based on the positive forecast and the initiatives being put in place by the NSE, investors should be optimistic about recovery of the market in 2017.
He believes the economy will achieve the projected growth driven by certain factors.
He said there should be vigorous fiscal policy implementation, with a keen focus on articulation of desired goals.
“There should lower the rate of disruptions to oil infrastructure from resolution of the Niger Delta conflict, thereby increasing FX inflows. Crude oil prices remaining above the FGN’s benchmark of $42.5/barrel positive impact of the war against corruption manifested in ease of doing business improvement and policies aimed at boosting economic productivity (improved budgetary allocation to capital expenditures, exit from joint venture cash call arrangements with international oil companies by the federal government, which is expected to save the country $2billion annually among others),†he said.
The NSE boss noted that notwithstanding the foregoing, the Nigerian capital market will have to do a better job at promoting its unique value proposition to both global and domestic investors.
“Monetary policy will continue to play a vital role in determining activity in the market. With forecasts for inflation expected to moderate due to the base effect, we believe that all things equal, monetary authorities will have more flexibility with respect to interest rates and FX regime. Hence, good coordination between fiscal and monetary policy should result in resolution of aforementioned structural deficiencies and drive economic growth,†he said.
On his part, Onyema disclosed that the NSE will take an adaptive approach to strategy execution in 2017.
According to him, the NSE will focus on achieving its goal of becoming a more agile and demutualised exchange and will fast track efforts towards developing innovative products such as exchange traded derivatives to provide investors with tools to better weather economic realities in 2017.
“We intend to strengthen our thought leadership efforts with policymakers to drive policies that will free up the system and promote the ease of doing business in Nigeria. We believe that incentive schemes for sectors of the economy that can support a pivot to export led economy will be beneficial and systematic removal of impediments to doing business and therefore reduction of leakages will attract private sector investments,†Onyema said.
He added that they expect to see a revival of supplementary listings, return of the new issuance market, and potentially one initial public offering (IPO) since the equity market is a forward indicator of the economy.
Furthermore, he said that the Nigerian capital market will do a better job of promoting its unique value proposition to both global and domestic investors.
“We expect investors to continue to keep a close eye on the divergence between the interbank FX rate and other exchange rates in the country. Accordingly, a convergence of FX rates in the country and the performance of listed corporates will determine the level of market activity in the short term,†Onyema said.
Analysts’ Projection
Looking ahead, analysts at Meristem Securities Limited (MSL), an investment banking firm, projected that the Nigerian stock market would close 2017 positively. In a special report on the economic and financial outlook titled: ‘In Murky Waters…Wading through Uncertainties,’ analysts at MSL had said the NSE ASI will gain 3.49 per cent.
According to them, the market is expected to remain largely weak in the first half of 2017, on the back of subsisting macroeconomic uncertainties, while they anticipate a modest recovery towards the tail end of the year.
“However, we note that market recovery is partly hinged on stability in the FX market and moderation in exchange rate gap between the interbank and parallel markets. Based on our mix of methodologies, we arrived at a 2017 index level of 27,812, 50, indicating a +3.49 per cent potential market return by December 31, 2017,†they declared.
CBN New FX Window Boost
Having declined by 5.0 per cent in the first quarter (Q1) of the year, the second quarter began on a similar negative note. The growth was partly spurred by impressive results and dividends declared for the 2016 financial year. However, the market rebounded in April following the introduction of the new window for investors and exporters (I&E) with the index spiking 11.92 per cent within three weeks.
From a low of 25,189.27, the index closed by the end of June at 33,117.48, while market capitalisation surged from N8.716 trillion prior to the new FX policy to N11.452 trillion. This translated to a gain of N2.736 trillion.
An analysis of the market’s performance after the launch of the FX window showed that in the week ended April 28, 2017, the index rose by 2.26 per cent to close at 25,758.51, while market capitalisation closed at N8.913 trillion. Investors exchanged 1.33billion shares valued at N9.671 billion in 16,300 deals.
The second week of the bullish trading saw the index rise by 1.85 per cent to close at 26,235.63, just as market capitalisation closed higher at N9.069 trillion. In the week, which ended May 5, investors also exchanged 1.154 billion shares worth N10.439 billion.
However, the market made record-breaking gains in the third week when the index surged by 7.46 per cent to close at 28,192.46, while market capitalisation rose to N9.741 trillion. Equally, the volume of trading jumped to 3.255 billion shares valued at N28.738 billion in 25,370 deals.
Analysts at Cordros Capital Limited said they sensed improved investor appetite for risk assets on the Nigerian bourse, judging by market activities in the past three weeks and more specifically the spike in the number of deals and the volume of shares traded.
They linked the performance to reduced apprehension in the macroeconomic environment, impressive full year 2016 and 2017 first quarter (Q1) results of highly capitalised companies, as well as increased confidence and liquidity in the FX market.
Supporting this assessment, analysts at Afrinvest (W.A) said 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 I&E FX window which signalled a possible return of flexibility in FX 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 (Economic Growth and Recovery Plan), 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.
Going by the trend in the market, sustaining that performance will significantly depends on the ability of the CBN to ensure stability in the FX market.
However, this may not be an issue as the apex bank had said that it was determined to ensure that the gains made so far, with respect to the stability of the exchange rate, were not eroded.
CBN spokesman, Isaac Okorafor reiterated the bank’s commitment to ensuring that there is enough supply of forex to genuine customers to achieve the forex rate convergence in the market.
Ayodeji Ebo of Afrinvest West, an investment banking group, had painted bullish trend in the market saying, despite the witnessed between the last week of April and end of May, Nigerian stocks were still trading cheap.
According to him, a review of banks’ price to book (P/BV) and earnings multiples reveal that banks’ earnings remained upbeat in the past three years notwithstanding the decline in share prices.
“Now, with the improvement in FX supply as well as the creation of I &E window, I have observed improved mandates from FPIs. The market determined rates at I &E window have translated into the FPIs receiving more naira value for every dollar inflow, giving them the ability to acquire more financial assets. As highlighted by the CBN, activity level at the window has been impressive as over $1.0 billion in transactions have been carried out, with the CBN supplying only about 30 per cent of FX at the window. The impact of the success recorded at the window has been evident in the performance of the NSE as a number of stocks have rallied on the back of bullish sentiments and I believe there is further room for upside in some stocks,†Ebo said.
