With about six trading days left in 2020, the stock market has recovered from the decline suffered in 2018 and 2019 and is set to close with a growth of about 40 per cent, writes Goddy Egene
When trading at the stock market resumed in 2020, there was high optimism that the market would witness a recovery from the losses recorded in 2018 and 2019. The optimism was based on past experience in the market, where a rebound is always witnessed after two years’ decline.
For instance, after declining in 2015 and 2016, the nation’s bourse recovered with a jump of over 40 per cent in 2017. So when the market dipped in 2018 and 2019, market stakeholders were optimistic that 2020 will see the return of the bulls to the stock market.
According to a stockbroker and Chief Executive Officer of Sofunix Investment and Communications Limited, Mr. Sola Oni, the market operated under a tough economic climate in 2019 as evident in incessant bearish trend until the policy of the Central Bank of Nigeria on Open Market Operations (OMO) crashed yields on fixed income securities.
“Expectedly, investors took flight for safety and reverted to purchase of equities with multiplier effects on the rise in many performance indicators. The NSE remains an investment destination,” he said.
He said the outlook for the market in 2020 is attractive, adding, however, that this is contingent on fixing of Nigeria’s weak economy where the Gross Domestic Product (GDP) currently grows at 2.3 percent while the country’s population grows at 2.6 per cent.
“We expect faithful implementation of 2020 budget which was approved on record time.
Government at all tiers should also take advantage of the market to mobilize fund for development projects. However, we expect the market to be driven by a mix of factors. Effects of negative real return on fixed income securities following the new policy on OMO will continue to enhance demand for equities and attract more investors into the market. We expect consolidation to be the hallmark of insurance sector as the market shall witness a flurry of mergers and acquisitions as well as business combination in a bid by insurance companies to recapitalise in line with the new policy of the National Insurance Commission (NAICOM),” he said.
Oni said many stocks are still trading below intrinsic values, hence, attractive valuation will attract more investors.
“This is expected to enhance price discovery and usher investors on the exchange to modern risk management whereby they can hedge against volatility. We expect introduction of more innovative products to accompany derivative trading.
“Barring unforeseen circumstances, the exchange is likely to commence demutualisation and this will change the structure of the market as the current owners, the dealing member firms shall become shareholders and thus bring a new era of corporate governance on the NSE.
“With the crash of yields on fixed income securities, pension funds may opt for high-yielding stocks in the securities market and this is expected to boost market activities,” he added.
Another operator, who was also highly optimistic is he Managing Director/CEO of Network Capital Limited, Mr. Oluropo Dada, who then said that fundamentals of the quoted companies remained strong despite the harsh macro-economic variables. Therefore, he expected a bullish performance.
“By way of dividend, many companies especially banks will return over 10 per cent yield based on historical records. Again, we expect pension fund administrators (PFAs) to make occasional intervention as a result of lower yields from the other market.
However, it appears local investors will be the major determinant of the outlook as higher yields from United States markets may keep foreign investors away for some time. By and large, 2020 appears more promising that the previous years because the valuations of the stock market instruments are becoming more attractive to all the various classes of investors,” Dada said.
Speaking in the same vein, the CEO, InvestData Limited, Ambrose Omordion, said low interest rate regime, increased credit to the real sector and early assent of the 2020 budget would impact positively on the market.
“The market in 2020 looks promising as factors that will shape the economy and stock market are on the increase, in spite of the continuous downgrade by rating agencies. The early implementation of capital expenditure would have multiplier effect on the economy,” Omordion said.
According to him, regulatory initiatives and policies such as the CBN Treasury Bills (TBs) and OMO restrictions will encourage local and institutional investors’ sentiment to the equity market.
He noted that the exchange’s new free float rule expected to commence on January 2, 2020 would improve market liquidity and transparency, thereby impacting positively on the market.
The high optimism and hope of early recovery in the market could not be manifested in the first quarter of the year due to declining crude oil prices and outbreak of Covid-19 that made some foreign investors to pull out their investments.
As a result, the market declined by 20.6 per cent decline in Q1. However, when it was envisaged that more decline would be recorded in the second quarter (Q2) was the period that the country was totally locked down due to contain the spread COVID-19, the market showed resilience and appreciated by 14 per cent.
Analysts said the decline posted in the Q1 depressed the prices of many stocks, which investors found very attractive in the Q2. According to a stockbroker, Mr. Ayo Oguntayo, “following the depreciation witnessed in the Q1, most stocks hit their record lows and offering very attractive entry opportunities for discerning investors. So, when the Q2 began and there were limited investment windows, investors found the stock market as a place to invest.”
He added that despite the lockdown and many businesses were counting their losses, investors were demanding for the stocks of companies in the healthcare, food and household products and telecommunications sectors, explaining that these sectors are believed to be favoured by the COVID-19 pandemic.
The bullish performance was sustained in the month of July leading to a positive start to the second half (H2) of the year as low prices of stocks and expectations for half (H1) year corporate results, attracted more investors to the market in the month of July, which led to the positive start of the H2 of 2020.
Also, in the month of August, the anticipation for the full opening of the economy, improved quarterly results of companies and dividends payment by some companies helped to sustain the rally with the market posting a growth of 2.56 per cent.
According to the Chairman, Association of Securities Dealing Houses of Nigeria (ASHON), Chief Onyenwechukwu Ezeagu, the gradual easing off of the lockdown, the gradual retuning of active economic agents and the fact that some of the results of quoted companies for the second quarter(Q2) were positive signaling impact that do not advance the gloomy predictions of doomsday advocates.
“The various cash injections following the COVID-19 palliative by governments and donor agencies helped to give impetus to the economy and by extension and vigour to the capital market. With the reintroduction of FX window options by the Central Bank of Nigeria (CBN), it is expected that the market will continue in its recovery trajectory,” Ezeagu said.
In her assessment, the Group Managing Director/CEO, Emerging Africa Capital Group, Mrs. Oluwatoyin Sanni, said the interest shown by investors was partly because most of them began to anticipate the full opening of the economy signalled by gradual reopening over the last few weeks as well as the downward trend in Coronavirus statistics.
“In August, investors expressed their interest in defensive and growth stocks with strong potential for future growth irrespective of the economic slowdown. In particular, demand for manufacturing and banking stocks helped the benchmark ASI to close higher. The positive momentum and sentiment towards companies that pay interim dividends and repositioning in the consumer and industrial goods segments kept the market on an upward,” she said.
Sanni added that the strength of the quarterly earnings reports of many small companies that showed promises attracted some investors as well thereby playing role in the growth recorded in the month under review.
Equally speaking, Head of Research, United Capital Plc, Mr. Wale Olusi, said the Nigerian equity market sustained the bullish trend in the month of August as investors continue to cheery pick on oversold stocks amid sustained decline in the yield environment.
“Despite uncertainties in the horizon, uptrend in the market is driven by cheap market valuation, especially in oil & gas names. Expectations for the yet to be released results of tier 1 banks as investors position ahead of interim dividend payment. Lastly, sustained reduction in yields on treasury Bills which continues to approach one per cent, account for the interest in the stock market as investors opt for riskier assets to make alpha returns,” he said.
The month of September marked a turning point for the market as the year-to-date (YTD) became positive with the market capitalisation closing the third quarter (Q3) at N14.052 trillion.
Market operators and analysts said the positive tilt in the market stemmed from investors’ continued favourable reaction to the cut in Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN)’ Monetary Policy Committee (MPC), purchase of undervalued stocks and end of year portfolio rebalancing.
“Following the payment of interim dividends, investors are positioning in fundamentally sound counters ahead of third quarter (Q3) earnings reports. Also, end of month portfolio rebalancing contributed to the positive tilt of the market,” analysts at Greenwich Research said.
Between October and last Monday, the market capitalisation witnessed an unprecedented jump of about N5.518 trillion while the NSE All-Share Index closed on with YTD growth of 39.5 per cent. It is expected that the growth would be maintained in remaining days to end the year.
Although the business continuation plan activated by the NSE following the lockdown, ensured that the market remained active, the CEO of the NSE, Mr. Oscar Onyema, said CBN’s policies contributed to the positive performance.
He linked the stock market rally to CBN’s restriction of domestic investors from participating in its open market operations (OMO) as well as the interest rate cut.
Onyema said investors are always in search of higher returns on investments, adding 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 added.