By Babajide Komolafe, Peter Egwuatu & Nkiru Nnorom
The Nigerian Stock Exchange (NSE) is set to hit the N10 trillion mark this week, in continuation of the superlative performance which greeted the decision of the Central Bank for Nigeria (CBN) to introduce a flexible exchange rate. Last week, total value of shares listed on the NSE, or market capitalisation, rose by N573 billion, to a six month high of N9.353 trillion, as investors swooped on the stock market. This prompted a flurry of increased demand for shares in anticipation that the new CBN policy will attract more foreign investors into the country.
“The recent rally in the market is due to the decision of the MPC to introduce a flexible exchange rate for the interbank market.
This has helped to boost confidence as domestic players gradually position for a re-entry of foreign portfolio investors when the details of the new exchange rate mechanism is made known to the public,” said Mustapha Suberu, Research analysts at Eczellon Capital Limited.
According to Jimmy Omoregie Evbuomwan, Managing Director, Fidelity Finance Company Limited, the stock market gain is also being driven by re-alignment of portfolio from fixed income to equities. “Investors are likely to re-align their portfolios in favour of equities market as fixed income instruments would become more unattractive due to the inflation trend associated with money market. This accounted for the rally recorded in the market in the previous week,” he said.
From N9.353 trillion on Tuesday to N9.926 trillion, market capitalisation rose by 6.1 per cent, while the All Share Index, ASI, closed higher, rising by 1,670.75 basis points or 6.1 per cent to settle at 28,902.25 points from 27,231.50 points on Tuesday. Though sentiment waned at the close of transactions on Friday, as activity across sectors recorded only marginal increase while total value and volume declined, year-to-date return remained positive. Overall, the equities market closed 6.5 per cent higher Week to Week W/W, with Year to Date, YtD, returns now at +0.9 per cent.
Market in flip flop
It would be recalled that as at March 31, 2015, the market capitalisation of 185 listed equities stood at N10.7 trillion and broke into N11 trillion mark by the end of second quarter of 2015. However, by the end of third quarter ending September 30, 2015 the figure had dropped by almost half to N6.911 trillion following the delayed take-off of the present administration, unavailability of economic blueprint, naira depreciation, and further fall in crude oil price among other factors.
Thereafter the market rose in the fourth quarter of 2015 and closed at N9.850 trillion. From January to April 2016, the stock market suffered from the avalanche of poor economic indices and weak corporate performance, which caused market capitalisation to fall cumulatively by N1.23 trillion to N8.62 trillion at the end of April. This trend however changed on Wednesday following the announcement by the CBN that it will adopt a flexible exchange rate.
Outlook for the week
While some market operators, like Omoregie of Fidelity Finance Company Limited, believe that the stock market will maintain the upward performance of last week, other operators like Suberu of Eczellon Capital Limited, opined that the performance will not be sustained.
According to Omoregie, “The market would do better this week because most stocks are still very cheap for repositioning for short and medium term portfolio management.”
Analysts at Afrinvest Plc were equally optimistic but with a note of caution. The company stated, “The impressive gains recorded during the week have been broadly driven by domestic investors taking position ahead of expectations of an increase in foreign participation. While we envisage the uptrend in the market to be sustained in the week ahead, we advise investors to trade cautiously as we await the details of the modalities for the currency market flexibility as guided by the CBN.”
Suberu, however, stated that the recent rally might taper this week as some investors are likely to book profit on recent price gains. He added: “However, should the details for the new forex regime be made available to the market in the course of the coming week, we envisage a sustained momentum in the recent rally that we have witnessed.”
Managing Director of Trust Yield Securities Limited, Rasheed Yusuf, expressed similar opinion saying: “The upsurge in the stock market is attributed to the portfolio investors’ reaction to the CBN’s announcement of new foreign exchange regime. The foreign investors had been clamouring for naira devaluation, but now that the CBN had moved for market determined rate, which I think is close to the naira devaluation being canvassed for by the foreign investors, we saw the market moving in upward movement.
This may not be sustained as the CBN is yet to come out with the mechanism through which the foreign exchange would be determined. The rise in the market is just driven by various sentiments and not backed by market fundamentals. The results released by companies so far are not fantastic, as companies are battling with various challenges bedevilling the economy.”
On his part, Mr. Tola Odukoya, Managing Director, Asset Management & Research, Dunn Loren Merrifield, noted that the superlative performance of the market provides opportunity for bargain hunting as investors sell to make quick gains from price appreciation recorded last week, leading to a reduction in market capitalisation. He said: “We must equally bear in mind that for every bull market, such as the one we are experiencing, a bear market lurks.
This explains the reason why many investors are not swayed by the current market gains. With this in mind, one might think that investors’ cautiousness about the market is warranted, given that the domestic economy is yet to attain sustainable recovery, not withstanding its potentials for growth.”
In the same vein, analysts at Cowry Asset Management said: “This week, we retain our expectation for a mix of bargain hunting and profiteering as speculative investors rebalance their portfolio in favour of current double digit fixed income yields.”
Shareholders however appeared to be divided on the outlook of the stock market this week. While Taiwo Oderinde of the Proactive Shareholders Association of Nigeria, PROSAN, opined that the gains recorded last week will not be sustained, Boniface Okezie of the Progressive Shareholders Association of Nigeria, PSAN, expressed a different opinion.
According to Oderinde, “Our market in volume and value terms for now is majorly dominated by foreign investors, so the upsurge I think is driven by them. So, I don’t see the recent gains being sustained. The foreign investors take advantage of the market when prices are low and sell at any slight gains and move away. It is time for regulators to begin to encourage local investors to invest in the market. The rebound in the market took too long and this discouraged the retail investors who just adopted the strategy of “sit and look” before they come in. Now, that there is a rebound in the market, we hope it will be sustained to attract local investors.”
Okezie however said: “I am confident that the market will bounce back. If government can put in place the necessary ingredients to propel the economy, it will then reflect on the disposable income of the people, who will in turn invest in the economy and stock market in particular. The federal government has approved the budget and once full implementation takes place, we will begin to see ripple effects.
The CBN’s decision to make the foreign exchange market a market forces determined rate and the gains recorded so far in the stock market could be a signal that the market embraced the monetary policy. The market is suffering from liquidity problem and once the economy becomes active, the market will follow suit.”