By Goddy Egene
The Nigerian stock market rebounded from the losses it suffered in February and March, gaining N418 billion in April on the back of impressive 2020 full-year results and positive 2021 first-quarter corporate earnings.
The market had declined in the two previous months due to profit-taking and shift to fixed income market following a sudden uptick in yields.
However, when companies began to release their 2020 full year results, showing unexpected impressive performance, many investors realised that the balance sheets of companies withstood the devastation of COVID-19 pandemic.
The high demand for stocks lifted the Nigerian Exchange Limited’s (NGX) market capitalisation from N20.429 trillion to N20.847 trillion, which translated to a gain of N418 billion.
Similarly, the NGX All-Share Index (ASI) rose by 2.0 per cent from 39,045.13 to 39,834.42. This is an improvement on the 1.9 per cent decline recorded in March.
Contrary to apprehension by investors that the COVID-19 pandemic might impair the profitability of companies, and hinder them from paying dividends, some leading companies did not only end 2020 better but also recommended dividends that further spurred the positive sentiments witnessed in the market in April.
Commenting on the performance of the market, a securities dealer, Mr. David Adonri of Highcap Securities Limited, said all sectors were lifted up by favourable sentiments.
He stated: “The equities market was lifted up by the surprisingly good full-year results released by several companies. Investors’ confidence soared from realisation that the balance sheet of companies withstood the devastation of COVID-19.
“Apparently, the heightened insecurity that brought the rural economy to a standstill did not, in general, affect the bottom line of most companies.”
He added that the excess monies from failed application for Federal Government of Nigeria (FGN) bonds, which inundated the equities market might have also contributed to its impressive performance in April.
He said: “Both bonds and equities benefited from the declining incidence of COVID-19 pandemic and increasing rate of vaccination.
“The increasing confidence generated by this event has already given impetus to International Monetary Fund (IMF) to revise Nigeria’s Gross Domestic Product (GDP) forecast for 2021 from 1.5 per cent to 2.7 per cent.
“The investors’ confidence that this vote of confidence can generate, is likely to propel Nigeria’s capital market to great height this year, save for crippling insecurity and hyperinflation.”
On her part, the Executive Director, NOVA Merchant Bank, Mrs. Funke Okoya, said the positive return on the NGX ASI in April reflected the appetite of investors for cash dividend declared in 2020 full year earnings season, especially as local investors remained the providers of liquidity in the equity market, as foreign investors’ participation remains.
“That being said, the strong performance of equities in April, despite the rising yield environment which would have to undermine risk appetite for equities, reinforces the capacity of the local investors and the need to build a self-sustaining local investor base that can progressively and sustainably fund a private sector-led economic resurgence and provide liquidity in the secondary markets.
“Clearly, Nigerian equities remain cheap and attractive at current valuation, thus reinforcing the potential return to investors, especially over the long term. Whilst rising yield may undercut the rally on equities in the months ahead, the discounted valuation on stocks is an opportunity for passive investors to build portfolios, capable of delivering superior returns over the long term.
“This is why Nova Merchant Bank continues to explore the synergy between our securities trading and asset management subsidiaries in providing end-to-end wealth management suite of offerings to local HNIs and foreign clients in ensuring they maintain diversified portfolios, actively managed by an experienced team of analysts and portfolio managers, based on diligent research, on-the-ground knowledge, best execution and client-centric philosophy,” she said.
Okoya stated that as much as the rising yield presents a downside risk to equity offerings and they continue to rebalance clients’ portfolio to reflect their proactive view on the different segments of the market and broader macro outlook, they remained buyers of equities.
“Albeit we are very selective in our stock options and this is perhaps one of those times when it is clinically important for portfolio managers to ensure investment decisions on discretionary portfolios are strictly aligned with client profiling, which is one of our fundamental guiding principles in either advising clients or managing their wealth.
“The rising yield environment also reinforces the call of NOVA Merchant Bank’s investment banking subsidiary for corporate clients to accelerate their debt capital plans and execution, to take advantage of the yield environment, which has seen a steep rise over the past four months,” she said.
A financial analyst, Abiola Rasaq, said the earnings season and more importantly corporate actions from major bellwether stocks triggered the appetite of local investors for stocks in April.
“Nonetheless, with the rising yield on a fixed income market, investors may be reducing exposure to equities, a phenomenon that may reflect the moderating risk appetite of both retail and institutional investors. Notably, the search for a higher return on investments, which stimulated capital flows into equity market late 2020 and early 2021, especially from local pensions and traditional asset managers, is gradually easing, given the considerable rise in the yield on fixed income securities, which have seen average of 550 basis points rise year-to-date,” Rasaq said.
According to him, inflation-adjusted return on a fixed income securities is still negative given the 50-month-high headline inflation rate of 18.17 per cent.
He added that compared to the average 14.1 per cent yield on the 30-year benchmark bond, the year-to-date rise in interest rate (using the Sovereign yield curve as a proxy) is likely to undermine cash allocation to equities, especially as institutional investors may become concerned that higher inflation and relatively weak economic recovery may weaken corporate earnings growth in the near term.
He said: “Double-digit return on risk-free sovereign notes may unfortunately undermine some progress made over the past 18months, when the lower interest rate environment partly helped in reducing the crowd-out effect of public sector borrowing in stimulating capital flow to the private sector.
“For instance, the 364-day treasury bill printed at 9.75 per cent discount rate at the last auction is some 75bps higher than the last auction and an incredible steep rise when viewed from the perspective of near-zero rate on treasury bills in the second half of 2020.
“The increasing appetite of investors for high yield risk-free asset is well expressed by the 2.75x subscription level at the last treasury bill auction. This is a phenomenon that was also evident at the last OMO auction when the 348-day treasury was issued at 10.1 per cent, saliently communicating probable shift in monetary policy authority’s stance in maintaining an accommodative policy aimed at steering the economy out of recession and perhaps a signal that the Central Bank of Nigeria (CBN) may again have prioritised its preference for naira stability over the appetite for low interest rate, especially as rising core inflation also presents a new constraint on the erstwhile policy stance.”
However, Rasaq stated that it is pertinent to also note likely profit taking by some active equity traders, whose hedge-fund-like investment strategy may justify a sell-off on stocks that are in-the-money, following the bull-run seen on stocks in 2020 and the modest price recovery in April 2021.
“More so, probable sell-off from local investors, some of who are renowned for their preference for cash dividend, may be influenced by the fact that they have qualified for most corporate actions declared on the back of 2020 full-year earnings season, with no major dividend attraction in sight until late-third quarter (Q3) when a few banks should declare interim dividends. Nonetheless, Nigerian equity remains a great asset class for both local and foreign investors, as it trades at discount to peer frontier and emerging market equities, as reflected by the valuation of comparable MSCI Indices. Interestingly, dividend yields on a number of value-counters on the NGX remain compelling, with a number of tier-1 banks and mid-cap stocks trading at double-digit dividend yields and incredibly low earnings multiples.
“Given the strong oversight of the CBN on banks, it is quite surprising that some large and mid-sized banks are trading at discount to their book values, an attractive valuation, which should hopefully drive alpha return for long-only investors with appreciable investment horizon, as the long term return on these stocks should compensate for the near term nuances and price volatility on the stocks,” Rasaq stated.