Despite rising inflation in Africa’s most populous nation, investment in the stock market, contrary to expectations, has continued to yield good returns for investors as year-to-date returns stood above 21 percent at the end of June. The implication is that investment in the market hedges inflation and offers positive return as at the review period. BAMIDELE FAMOOFO reports.
As at the end of May 2022, inflation in Nigeria’s largest economy stood at 17.71 percent, rising consistently for four months. Elsewhere, the situation is the same as rising inflation continues to threaten the global economy with Central Banks increasing interest rates to curb the menace.
In Nigeria, the Monetary Policy Committee of the Central Bank increased the Monetary Policy Rate by 150 basis points to 13 percent in a deft move to curb inflation.
However, investment in the nation’s capital market has maintained a positive stance as yield remains positive year-to-date as at June 30, 2022.
Figures published by the Nigerian Exchange Limited put year-to-date return as at June 30, 2022 at 21.31 percent which is above the inflation figure which printed 17.71 percent as at end of May.
Stock Analysts at Coronation Research led by Ola Ani disclosed that the NGX All-Share Index posted its best half-year performance in five years with market capitalization closing at N27.94 trillion.
Ending the first half of the year, Nigerian equities rebounded slightly as the benchmark index managed to eke out a meager 3bps gain to close at 51,817.59 points, the highest point since 27 June. The gain contributed to keep the index well on track for its second week of gain in the month and biggest half-year gain since half-year 2017.
The market’s performance was driven primarily by investor interest in UBN (+4.24%), FBNH (+1.75%) and SEPLAT (+0.78%). Consequently, the year-to-date return increased to 21.31 percent, while market capitalization gained N8.15 billion to close at N27.94 trillion.
Analysis of market activities on the last trading day in June showed trade turnover settled higher relative to the previous session, with the value of transactions advancing by 12.01 percent. A total of 223.11million units of shares valued at N3.87 billion were exchanged in 4,213 deals. FBNH (+1.75%), led the volume chart with 36.63 million units traded, while MTNN (0.00%) led the value chart in deals worth N1.37 billion.
Market breadth closed positive at a 1.06-to-1 ratio with advancing issues outnumbering declining ones. UPL (+9.79%) led eighteen (18) others on the gainer’s table, while PZ (-9.86%) topped 17 others on the laggard’s log.
Domestic investors to the rescue
Activities of local investors drove the performance of the stock market in the first- half of 2022 as foreign investors are on the run due to currency fluctuations. Foreign investors only account for around 13 percent of trading on the exchange compared with a long-term average of around 42 percent. The foreign funds remaining are either unable to withdraw or remain committed to the Nigerian investment case for the long term. Since the beginning of 2018, around N439.43 billion ($1.04bn at today’s rate) of foreign investor money has left the NGX Exchange.
On 23 June MSCI Inc., a global provider of equity, fixed income and real estate indexes, announced that it is considering removing Nigeria from its Frontier Markets Indexes (MSCI Frontier Markets and MSCI Frontier Markets 100 indexes), citing currency restrictions.
Specifically, since March 2020, FX illiquidity and the widening chasm between the official and parallel Naira exchange rates, according to MSCI Inc., have led to FX conversion and fund repatriation problems for foreign investors in the Nigerian equities market.
“Activities of local investors drove the performance of the stock market in first- half of 2022 as foreign investors are on the run due to currency fluctuations”
As a result, according to MSCI Inc, “Market participants have continuously expressed concerns related to the investability and replicability of the MSCI Nigeria Indexes and related composite indexes, such as the MSCI Frontier Markets Index.” This is not the first time MSCI Inc has considered removing Nigeria from the MSCI Frontier Markets (FM) Index.
In April 2016, a similar situation occurred owing to the Central Bank of Nigeria’s currency restrictions at the time. The market’s view then was that around $500 million in funds benchmarked to the MSCI FM index would head for the exit. In the end, Nigeria was not ejected, FX liquidity improved a year later (2017), and foreign investors bought Nigerian equities again in significant volumes. The situation now, six years later, is very different in terms of potential impact.
Financial experts at Financial Derivatives Company Limited headed by Bismarck Rewane predicted that foreign participation in the stock market will maintain its lackluster posture in the meantime.
“We expect portfolio inflows to remain significantly below pre-pandemic levels, given the lower yields on fixed income instruments and OMO bills compared to historical trends and CBN’s capital control measures. On FDI, we do not expect any significant divergence from historical trends due to the (1) continued presence of structural rigidities, (2) socio-economic problems, (3) policy inconsistencies, and (4) election uncertainties.”
June in retrospect
In the month of June, the performance of the sector was largely negative as four sectors lost while one gained. The banking sector recorded the highest loss (-7.51%). This was followed by the insurance sector (-2.51%), the consumer goods sector (-1.89%) and the oil and gas sector (-0.87%).
Meanwhile the industrial sector gained 0.14 percent. Mcnichols Plc topped the gainers’ list in May with a 182.86 percent increase in its share price. This was followed by Cadbury Nigeria Plc (72.68%), Abbey Mortgage Bank Plc (60.71%), Champion Breweries Plc (56.75%) and International Breweries Plc (54.90%). So far in June, Ellah Lakes Plc tops the gainers’ list with a 28.21 percent increase in its share price.
This is followed by Learn Africa Plc (21.95%), Nigerian Aviation Handling Company Plc (14.29%), P Z Cussons Nigeria Plc (13.54%) and Sovereign Trust Insurance Plc (12.50%). The laggards in May were led by Global Spectrum Energy Services Plc. (-26.72%), Ikeja Hotel Plc (-17.86%), Julius Berger Nig. Plc (-13.65%), FTN Cocoa Processors Plc (-13.51%) and Honeywell Flour Mill Plc (-13.51%). In the month of June, the laggards are led by International Breweries Plc (-20.89%), Ecobank Transnational Incorporated (-19.20%), ETranzact International Plc (-18.67%), FBN Holdings Plc (-18.49%) and Beta Glass Plc (-18.15%).
“The interest rate hike will make investors rotate their funds to fixed income securities due to higher yields and dampen market sentiment. Market is expected to trade horizontally until the release of H1’22 corporate results”
African Peer to Peer Review
Data obtained from the African Stock Exchanges (AFX) indicated that the Nigerian bourse performed far above its peers in Africa with All-Share Index moving up by +12.08 percent in three months and YTD return at 21.33 percent.
Nairobi Stock Exchange grew its NASI Index by 0.47 percent while year-to-date return dropped by -24.94 percent as market capitalization closed at KES 1.94 trillion as at June 30, 2022.
All market performance indicators at the Johannesburg Stock Exchange (JSE) in South Africa are in the red. The J203 Index dropped by -165.51 percent as at June ending, YTD return recorded -10.38 percent while market capitalization stood at ZAR 19.56 trillion.
The Ghana Stock Exchange (GSE) in the neighbouring West Africa recorded a negative YTD of 8.73 percent with market index remaining flat at 0.00 percent in the review period. Market capitalization stood at GHS 64.84 billion as at June 30, 2022. While year to date return was green at the Zimbabwe Stock Exchange in the review period +81.01 percent, All-Share Index dropped by -201.89 or -1.02 percent.
Outlook
Rewane noted that investor sentiment has been jittery due to expectations of another interest rate hike in July as inflationary pressures remain in the country.
“The interest rate hike will make investors rotate their funds to fixed income securities due to higher yields and dampen market sentiment. Market is expected to trade horizontally until the release of H1’22 corporate results,” he said.
