- Investors amass N18.2trn gain in three months
- Market capitalization closed at N59.12trn
- All-Share Index beats international benchmark at 39.84% growth
Despite Nigeria’s economy facing challenges such as double-digit inflation, the Nigerian stock market witnessed significant price growth in Q1 2024, with the All-Share Index (ASI) rising by 39.84 percent Year-to-Date (YTD), reaching 104,562.06 points by March 28th, BAMIDELE FAMOOFO reports.
The market amassed impressive gains totaling N18.2 trillion for investors, led by the industrial sector with a remarkable 78.49 percent YTD growth as the market cap of listed equities rose 44.50 percent to close the Q1:24 at N59.12 trillion after hitting the N60 trillion mark.
NGX demonstrated resilience, surpassing international benchmarks and achieving a 39.84 percent increase in ASI, amidst macroeconomic challenges and consecutive Monetary Policy Rate (MPR) hikes by the Central Bank of Nigeria. Sector-wise, NGX Industrial Index led with a 78.49 percent increase YTD, followed by Consumer Goods (+43.66%), Banking (+14.76%), Oil & Gas (+24.09%), and Insurance (+26.20%).
Foreign portfolio investment
In February 2024, foreign portfolio participation surged from N53.11 billion, rising to N65.81 billion, marking a notable 23.91 percent increase in foreign involvement. This increase is attributed to expectations of Naira appreciation and improved forex liquidity, rendering Nigerian securities comparatively more attractive to foreign investors.
Despite the growth in foreign participation by 23.91 percent, the total transactions at the bourse declined and this decline is attributed to the substantial decline in domestic transactions dropping by 51% from N598.41 billion in January to N292.07 billion in February. The rapid depreciation of the naira likely prompted investors to convert their currency to dollars, contributing to the decline in domestic transactions.
“In February 2024, foreign portfolio participation surged from N53.11 billion, rising to N65.81 billion, marking a notable 23.91 percent increase in foreign involvement”
Sectoral performance
Banking sector
The Banking Index on the NGX exhibited notable growth in Q1 2024, expanding by 14.76 percent from 894.20 on January 2nd to 1,029.63 on March 28th, 2024.
Leading banks such as FBNH, Wema Bank, and GTCO significantly contributed to this price growth, with impressive Year-to-Date (YTD) returns of 51 percent, 51.8 percent, and 29.6 percent, respectively.
Wema Bank emerged as the top-performing stock in the sector, boasting a remarkable Year-to-Date (YTD) price growth rate of 51.8 percent, potentially driven by investor anticipation of favourable earnings and strategic positioning. As seen in the full year 2023 result of the banks, especially the tier one banks, there was a positive increase in their revenue as well as PAT, this was majorly driven by foreign exchange gains and an increase in the net interest income of these banks.
The new CBN capital requirement will lead to more capital market activities in this sector spanning from public offers, mergers and acquisitions, right issues. A few of these banks are already positioning for the new capital requirement development as the likes of Fidelity Bank who have approved a right issue of N3.2billion at N10 per share, First Bank planning to raise N300 billion and Access Bank proposing to raise N365 billion through a right issue.
Industrial sector
The industrial sector led the pack in Q1 2024 on the NGX, driven by significant developments within key companies. Femi Otedola’s substantial investment in Dangote Cement (DANGCEM) helped in boosting the share price of DANGCEM. DANGCEM’s share price surged by an impressive 115 percent in the quarter, from NGN 319.90 to NGN 686.70, affirming its attractiveness to both institutional and retail investors.
BUACEM also saw a notable uptick, with a year-to-date appreciation of 67.74 percent, fueled by positive investor sentiment. Despite challenges like FX volatility, Lafarge Africa achieved a significant rally, further enhancing the sector’s stellar performance. These factors collectively underscore the resilience and growth potential of the industrial sector, making it the standout performer on the NGX in Q1 2024.
FMCG companies and their Fx losses
Oil and Gas sector
The removal and subsequent reintroduction of fuel subsidy in fiscal year 2023 had significant implications for oil and gas players listed on the Nigerian Stock Exchange.
Seplat Energies Plc experienced limited direct impact due to its focus on upstream operations, but market dynamics and regulatory changes could affect revenue indirectly.
MRS Oil Nigeria Plc: Experienced significant implications with changes in profitability and operational costs, particularly in downstream activities such as petroleum product marketing and distribution.
Oando Plc: Downstream operations, particularly retail and marketing, were likely affected by fluctuations in pricing and demand, while upstream activities may have been less impacted.
Eterna Plc: Faced mixed effects, potentially experiencing margin pressures in the downstream market and forex losses while benefiting from improved market dynamics in the long term.
Total Energies Plc: Dealt with complex implications across the oil and gas value chain, including impacts on refining margins, retail sales, and overall market dynamics. However, its diversified operations may have aided in adaptation.
Overall, the removal and subsequent reintroduction of fuel subsidy had varying impacts on these companies, influenced by their specific operations and ability to navigate regulatory changes in the Nigerian oil and gas sector.
Fixed income and money market review
During Q1, Nigeria’s secondary bonds market saw a bearish trend, especially in longer-dated bonds, driven by interest rate hikes. Average yields rose sharply to 19.41 percent by March 2024 from 12.03 percent in December 2023 due to increased sell-offs.
Investors favoured shorter-dated instruments amid concerns over rising interest rates and inflation. Foreign participation in FGN bonds increased, attracted by higher yields from larger bond sales by the DMO
The DMO’s shift towards larger bond sales aims to align with the cash flow needs of the Federal Government of Nigeria and reduce reliance on Central Bank of Nigeria financing. This strategy may result in increased issuance in the short term due to timing discrepancies between fiscal collections and budgeted expenditures, potentially raising interest rates.
During the quarter, the DMO conducted monthly auctions offering N3.31 trillion worth of FGN securities, introducing new 3-year, 7-year, and 10-year federal government papers. However, the subscription fell short of the Offer due to investors’ expectation of further increases in rates and preference for short-dated instruments.
Consequently, only N2.39 trillion was sold (N2.50 trillion including non-competitive bids), with total subscriptions of N3.12 trillion, resulting in bid-to-cover and sales-to-offer ratios of 1.31x and 0.72x, respectively. Yields rose to 19.94 percent (3-year), 20.00 percent (7-year), and 24.45 percent (10-year).
Eurobond market: Positive outing for the Nigerian Eurobond
In the Eurobond market, the positive trend seen in 2023 continued, as average yields on Nigerian Eurobonds decreased by 20 basis points to 9.42 percent by March 2024 from 9.62 percent in December 2023. This was due to heightened investment in Nigeria’s Eurobonds, driven by expectations of a pause in rate hikes in developed economies and favourable global dynamics, leading to a significant reduction in yields.
The decline in Eurobond yields was a fallout of declining inflationary pressures and interest rates in certain developed nations, leading to widespread optimism.
The Minister of Finance, Wale Edun, announced the government’s intention to issue domestic bonds denominated in foreign currency during the second quarter of 2024.
This initiative seeks to increase liquidity in the foreign exchange market and strengthen the value of the Naira.
Money market: CBN offers ample investments amidst tight liquidity
Average yields on Nigerian treasury bills surged to 16.81 percent by March from 9.75 percent in December 2023, driven by CBN’s offer of new Papers at significantly higher rates in its efforts to tame inflation. Investors’ preference was the 1-year bills, due to its attractive yield. Other money market rates, including open-buy-back/repo rates and overnight lending rates, both reacted to the liquidity withdrawals from the T/Bills auctions and the increase in yield and climbed to 27.29 percent and 28.21 percent respectively in Q1 2024.
At primary auctions, the CBN raised N6.01 trillion in Nigerian Treasury bills to roll over maturing bills, meeting its domestic borrowing target. Average rates rose significantly by 837 basis points to 18.12 percent, with total subscriptions at N12.22 trillion, indicating bid-to-cover and sales-to-cover ratios of 2.03x and 2.71x respectively. The CBN adjusted rates upwards across different maturities to attract investors into holding more Naira-denominated assets, responding to market changes and economic conditions. The CBN restarted its OMO bills auction, offering N1.45 trillion, which garnered strong demand totalling N2.61 trillion, especially for the longer term, with an average bid-to-cover ratio of 1.37x.
Macro-economic outlook
Inflation rate outlook
The continued uptick in inflationary pressures is expected to start moderating by Q2 2024 due to the Naira appreciation and kick-in of the base effect. Food prices are however expected to moderate slowly due to the impact of insecurity challenges on the food supply chain.
It should be stated that the expected deceleration in the inflation rate from Q3 2024 does not mean that prices would start coming down (deflation) rather the rate at which prices were increasing will moderate (disinflation).
The projected decline in the inflation rate is therefore not expected to lead to a material improvement in the standard of living of most households unless there is an improvement in household income possibly from the expected public servants’ salary increase.
Finally, we believe that the concern being expressed in some quarters that public servants’ salary increase would have an inflationary impact is unfounded given the huge gap between current household average income and minimum living household income.
Interest rate outlook
The Central Bank of Nigeria and the Debt Management Office have collectively withdrawn about N12.7 trillion from the financial system between January 2 and April 15, 2024. The discount rates of over 20 percent on the 364-day bills and the amount of liquidity withdrawal have led to a spike in interest rates.
“We project that interest rates will remain elevated in Q2 2024 before we begin to see some moderation by July. This is further reinforced by the pressure to sustain the gains recorded in foreign exchange rates.
“The massive borrowing by the Central Bank and Federal Government would also lead to a significant increase in Banks’ deposit rates as Corporate Organizations’ increased offer of Commercial papers provides alternative short-term investment outlets for Bank depositors.”
Exchange rate outlook
“The Naira has experienced significant appreciation against the US dollar starting from the month of March to close at N1, 080/$ and N1, 136.04/$ at the Parallel and NAFEM markets respectively by the close of business on April 15, 2024.
“We project that interest rates will remain elevated in Q2 2024 before we begin to see some moderation by July. This is further reinforced by the pressure to sustain the gains recorded in foreign exchange rates”
“The government’s plan to issue foreign currency-denominated bonds in June will further boost forex liquidity in Q2 2024. The ability of CBN to sustain the current Naira defence is however doubtful given the huge cost of this adventure.
“We, therefore, expect that the current Naira appreciation will moderate in Q2 2024. This is further reinforced by the consistent decline in crude Oil production.”
Equity market outlook Q2 2024
Analysts believe that Nigeria’s equities market will witness significant southwards price adjustments in Q2 2024 driven by factors like current over-valuation of many stocks beyond their intrinsic value, elevated yield on fixed-income instruments with attendant portfolio rebalancing by Fund Managers, likely weak performance by many of the quoted companies due to the country’s harsh economic environment.
Fixed income markets outlook
The CBN’s priority to uphold price stability as observed in the hawkish monetary policy stance will result in persistent higher rates in the fixed-income sector, as observed in Q1 2024, as they try to combat inflation. In the bid to attract foreign inflows, the CBN has been intentional with higher rates on auctions, issues, and reopening. Given the persisting challenges in the FX market, we expect the offers to continue in Q2 2024 by reducing volume and rates.
“In the Eurobonds market, we expect the yield on advanced economic instruments to moderate as inflation and interest rates in those economies trend downwards. However, yield on emerging and frontier economies’ sovereign and corporate Eurobonds will remain elevated as investors insist on sufficient compensation for the high default risks inherent in instruments issued by these entities. The demand for higher interest rates on developing economies Eurobonds will also constrain primary market activities,” Analysts at Cowry Asset disclosed in a report.
