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Goddy Egene writes on the excitement in the stock market following the positive trajectory and record high demand that has led to spike in share prices
The Nigerian stock market has, over the years, been different things to investors. To some investors it is their number one choice, while to others, it is a no-go-area given the bad experience of 2008 and 2009, when global financial meltdown led to crash in stock markets.
That experience has continued to keep many investors away from the market in Nigeria. Hence, despite a population of about 200 million people, there are fewer than five million investors in the Nigerian stock market. However, the performance of the market in recent times is fast changing the attitude of some discerning investors who are searching for positive returns on investments.
Before now, the fixed income securities market, which guarantees fixed return on investment, was the preference for most investors who are risk averse. However, with the crash in money market rates and increasing inflation that hit 14.2 per cent in October, returns in the money market are now deeply negative.
The only place providing positive returns on investments right now is the stock market, which is attracting unprecedented flow of funds. The high demand for equities has made the market to record a consistent growth since the second quarter after a decline in the first quarter.
As at close of trading on Monday, the main index of the stock market, the Nigerian Stock Exchange (NSE) All-Share Index (ASI) has recorded a year-to-date gain of 29.4 per cent. Investors in some stocks have recorded gains higher than the NSE ASI with Neimeth International Pharmaceuticals Plc posting a gain of 369 per cent.
No capital market stakeholder expected the massive growth being witnessed in the market now following the poor performance recorded in first quarter and the challenges brought by the COVID-19 pandemic. Although the market was expected to rebound in 2020 after dipping in 2018 and 2019, it declined by 20.6 per cent in the first quarter as a result of COVID-19 pandemic impact among other factors.
However, contrary to expectations, the market rebounded in April and sustained the growth through the second and third quarters in spite of COVID-19 induced economic lockdown.
Analysts said the market remained resilient because of the measures taken by regulators coupled with some stimulus package announced by the Central Bank of Nigeria (CBN) to support the real sector given COVID-19 spillovers.
For instance, despite the economic lockdown, trading at the stock market continued as the NSE activated its business continuity plan (BCP). As part of the BCP, the NSE adopted a remote trading and the Chief Executive Officer (CEO) of the NSE, Mr. Oscar Onyema, assured stakeholders that in line with their robust business continuity management framework, the exchange had put in place measures to ensure their operations and trading activities continue seamlessly throughout this period.
“As an exchange, we will ensure that all relevant information continues to flow into the market to ensure the pricing of risk assets remains transparent and reliable across asset classes to allow investors to value their portfolios and make informed investment decisions under these volatile conditions. Dealing members are, therefore, encouraged to continue to trade remotely via our electronic platforms such as FIX protocol and XNET, and reach out to their Compliance Officer if any support is required. Please note that we will provide manual support to members without remote access during this period. Issuers who have any business to conduct with The Exchange can reach out to their Relationship Manager for guidance. You should continue to submit all regulatory filings via Issuers’ Portal (X-Issuer),” he said.
The CBN announced measures aimed at supporting the economy, a development that gave confidence to investors to invest in the market. Some of the measures announced by the apex bank included the reduction of interest rate to 5.0 per cent from 9.0 per cent and a one-year moratorium on all CBN intervention facilities. The apex bank also created a N50 billion targeted credit facility to support households and SMEs as well as a special credit support of N1.1 trillion for the manufacturing and the healthcare sectors respectively. In addition, the CBN announced a private sector coalition to support the federal government in procuring medical supplies to contain COVID-19 pandemic. To further support the economy, the commercial banks have also been granted regulatory forbearance in the restructuring of loans.
On the fiscal side, an ‘Emergency Economic Stimulus Bill 2020,’ that proposes temporary measures to cushion the effects of COVID-19 spillovers on Nigerians and businesses and is expected to terminate in December, 2020.
Some of the provisions of the Bill include the suspension of import and stamp duties on essential medical supplies required to fight the pandemic as well as a 50 per cent rebate on corporate taxes and the imposition of new moratorium on mortgage obligations.
Although the measures were expected to have positive impact on the market on the long run, the CBN’s restriction of domestic investors from participating in its open market operations (OMO) as well as the interest rate cut boosted the stock market rally.
Alluding to this fact, Onyema said investors were always in search of higher returns on investments, noting that CBN’s policies have made the stock market attractive to investors.
He said: “I must say that some of the policy changes include the CBN policy that domestic institutional investors should stop participating in the OMO market. That has driven significant funds into the Nigerian Treasury Bills (NTB) market and some of those funds have found their way into the equities market. We have also seen a cut in interest rate.
That was a significant move in support of equities as an asset class. What investors tend to do is to look for yield.”
According to Onyema, since the Nigerian economy has shifted into a negative real interest rate environment, investors are now in search of investments that would give them higher yields and returns.
“Given the record dividend yield available in the Nigerian market and given the strong fundamentals of a number of companies that are listed on the Exchange, it makes sense that as investors try to rebalance their portfolio, they would look at equities,” the NSE CEO stated.
Also speaking, the Chief Research Officer, Investdata Consulting Limited, Mr. Ambrose Omordion, said the positive performance in the market stemmed from continued activities of bargain hunters, who have swooped on the stock market in search of higher yields in the face of increasingly negative real returns in the fixed income market and absence of attractive alternative investment options.
According to him, the low yield environment and other factors have triggered buying interest in the equity space despite the seeming disconnection with economic realities to sustained the four consecutive months of bullish run.
Also, the better-than-expected Q3 corporate results aided the positive performance.
“Since stock prices reflect expectations about profitability, and profitability is directly linked to economic activity, fluctuations in stock prices are thought to show the direction of any economy. But our market since April has rallied on liquidity and sentiments ignoring economic fundamental and at the same time pointing to economic recovery as quoted companies’ numbers remain resilient in the midst of negative macroeconomic indicators,” Omordion said.
He said the possibility of prices rallying further was high, amidst portfolio reshuffling on the strength of the Q3 numbers, just as investors would be assured of reward in the form of dividends when the full-year score-cards begin to flow into the market in the early days of 2021 despite the possibility of dividend cut.
“It is expected that discerning investors and traders would take advantage of the prevailing relative low stock prices, year-end season and cycle to grow their income, ahead of major earnings season in the first quarter of 2021,” he added.
The continued high demand which led to a spike in stocks prices prompted the NSE to activate the circuit breaker when the NSE ASI rose beyond the set threshold of 5.0 last Thursday. That was the first time that the circuit breaker had been triggered since its introduction in 2016.
The exchange explained that the circuit breaker protocol was triggered by the increase of the NSE ASI from 33,268.36 to 34,959.39. The market reopened at exactly 1:25p.m. with a 10-minute intraday auction session, before resuming continuous trading till the close of the day at 2:30p.m.
The Chairman of Association of Securities Dealing Houses Association of Nigeria (ASHON), Chief Onyenwechukwu Ezeagu, said triggering the circuit breaker by the NSE was a welcome development.
“Usually circuit breaker is a safety valve that enables the exchange manage unusual market price volatility, enabling market back room managers to stop trading and figure out the cause of the unusual development. This ensures stability and integrity of prices of stocks and forestall unintended consequences,” Ezeagu said.
The bullish trend has increased the wealth of investors as many of the stocks have recorded significant growth that is highly above the inflation rate. This means these investors are counting gains in the investment and not losses.
Neimeth is leading with 369.4 per cent, while Livestock Feeds Plc has appreciated by 162 per cent.
United Capital Plc has chalked up 88.7 per cent, just as FCMB Group Plc has garnered 81.6 per cent. Northern Nigerian Flour Mills Plc has added 79.7 per cent, just as Fidson Healthcare Plc gained 77.4 per cent.
May & Baker Nigeria Plc has appreciated by 70.9 per cent; Presco Plc, 67.8 per cent; Vitafoam Nigeria Plc, 59.1 per cent; Japaul, 55 per cent; African Prudential Plc, 50 per cent; and MTN Nigeria Plc, Dangote Sugar Refinery Plc and Coronation Insurance Plc (47 per cent apiece).
Others are: BUA Cement Plc(45.6 per cent); Okomu Oil Palm Plc(43.8 per cent); Lafarge Cement Plc (43.7 per cent); Flour Mills of Nigeria Plc (42.3 per cent); Ekocorp Plc (41.1 per cent); Dangote Cement Plc (40 per cent); Zenith Bank Plc (39.7 per cent); NPF Microfinance Bank Plc (39.1 per cent); Cutix Plc (36.8 per cent); LASACO Assurance Plc (36 per cent); Unity Bank Plc (34.3 per cent); NASCON Allied Industries Plc (30.8 per cent) Portland Paints and Products Plc (30.8 per cent);FTN Cocoa Plc, Mutual Benefits Assurance Plc (30 per cent each); Cornerstone Insurance Plc (28.8 per cent), 11 Plc (28.4 per cent); Eterna Plc (27.7 per cent); Fidelity Bank Plc (27.3 per cent); AIICO Insurance Plc (25 per cent); FBN Holdings Plc (23.5 per cent); Guaranty Trust Bank Plc (21.2 per cent); Regency Insurance Plc (20 per cent); Union Diagnostic and Clinical Services Plc (18.1 per cent); United Bank for Africa Plc (17.4 per cent); Honeywell Flour Mills Plc (17.2 per cent) and Total Nigeria Plc (17.1 per cent).
However, it is not all gains as some stocks have posted depreciation so far. Arbico Plc led the decliners with 70.6 per cent, trailed by NCR Nigeria Plc with 60 per cent. Omatek Plc shed 52 per cent, while Afromedia Plc declined by 41.1 per cent.
Seplat Petroleum Development Company Plc depreciated by 39 per cent, just as Unilever Nigeria Plc and Guinness Nigeria Plc went down by 34 per cent and 33.6 per cent respectively among others.