October 5, 2021

Capital gains in stocks hit 7-month high at N1.2trn

Millennials and the future of the Nigerian Stock Exchange

*Devpt driven by crude oil price rebound – Analysts

By Nkiruka Nnorom

Nigeria’s stock market has made a dramatic rebound with third quarter 2021 figures showing capital appreciation of about N1.196 trillion.

Analysts attributed the development to the recent upswing in the prices of crude oil in the international market coming at the time third quarter earnings season is speculated to turn out positive figures.

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The development was also largely in line with the analysts’ speculation that the market would take a turn for the better despite the negative sentiment that had pervaded for most part of the first half of the year (H1’21) over the rise in rate in fixed income instruments during the period.

Recall that the market had declined by 6.2 percent in H1’21 after the benchmark All Share Index (ASI) fell  to 37,907.28 points in June, 2021, leading to N1.3 trillion losses to investors.

However, the trend began a reversal in July and culminated in a northward movement at the end of the third quarter.

The price of crude oil rose to over $80/barrel in September and is projected to cross $90 at the end of the year.  

Specifically, the market capitalisation of all listed equities, which represents investors’ wealth, rose to N20.956 trillion at the end of Q3’21 from N19.760 trillion at the beginning of the quarter, representing a 6.05 percent increase. 

Similarly, the All Share Index recorded a seven month high, rising by 6.11 percent to 40,270.72 points at the end of the review period from 37,907.28 points at the beginning of the quarter, thereby moderating the Year-to-Date (Y-to-D) losses to -0.1 percent.

This also reflects the trend in Q3’20 when investors gained N1.255 trillion after the market capitalisation appreciated to N14.025 trillion at the end of the period from N12.770 trillion it started the quarter, thus representing a 9.8 percent increase.

Explaining the rebound to profitability, Ambrose Omorodion, Chief Operating Officer,  Investdata, said: “The nation’s equity market rebounded in September to end the month and quarter positively on rekindled buying interest in blue chip, value and growth stocks ahead of Q3 corporate earnings report and last quarter seasonality as activities in fixed income market is not clear despite the slight rate increase in one year Treasury Bill auction that closed at 7.5 percent.” 

Month-on-Month price movement 

Meanwhile, Month-on-Month (M-o-M) breakdown of trading statistics showed that the market kicked off the year on a bright note with investors gaining N1.131 trillion in January. However, the development was reversed in February as all the gains recorded in January were wiped out, resulting in N1.38 trillion losses to investors following the shift in investors’ preference to fixed income.

Average yields on primary market treasury bills (TBs) had risen to 3.67 percent at the end of February from 1.28 percent in January. This translated to an 186 percent increase.

The market sustained the losing streak in March, 2021 though on a slower pace, with investors again, losing N395 billion.

However, the two months of consecutive losses was reversed in April following the reallocation of assets to equities over the impressive full year financial statements of the companies as well as increased confidence bolstered by the increasing oil prices. Resultantly, investors gained N417 billion in April.

Analysts’ comment

Investment analysts have expressed optimism in the prospect of the market, saying that the year would end in uptick. They, however, stated that the bullish trend may not be strong as fixed income investment is expected to still be relatively attractive even in the second half of the year (H2’21) given the inflationary pressure and the depreciating naira against foreign currencies, especially the dollar.

Analysts at Cowry Asset Management, “We feel that the marginal recovery of the benchmark index in H2’21 would be engendered by appreciation in share prices of companies with attractive dividend yields, wider margins, rising earnings per share (EPS) and higher return on average equity.

“Also, companies that have their share prices trading above their equity value per share (EVS) and record higher profitability with declining leverage ratio should witness a certain level of capital appreciation in the concluding months of 2021.”

In his views, Mallam Garba Kurfi, Managing Director, APT Securities & Fund Limited, said: “This has to do with the expectation of good Q3 results plus the rising of crude oil prices.  They all give hope of a better return by the end of the fourth quarter. I still believed that ASI will close positively by the end of the year.”

Also speaking, Omorodion of Invesdata, said that position taking in high cap stocks that control 70 percent of the market benchmark index supported the rebound.

On the outlook, he said: “This rebound that pushed the Nigerian Exchange (NGX) index to breakout 40,000 psychological line, are expected to continue if corporate numbers beat expectations to maintain uptrend as seen in the previous quarters, considering the negative impact of naira devaluation and exchange market crisis.”

Analystys at Cordros Capital also expressed the possibility of a sustained market rally in the remaining part of the year. 

They hinged their optimism on possible return of Foreign Portfolio Investors (FPIs), who have been net sellers of Nigerian equities thus far, and expectation of dividend payment among others.

“In the fixed income market, we believe that yields are at a resistance level, and thus, we expect an inflexion in the naira curve from the second half of the year. We believe that reduced supply from the government, and deliberate efforts by the government to bring down the overall cost of borrowing, will facilitate a drop in yields, albeit above 2020 levels, in the coming months,” they said.

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