Investors’ reaction to President Bola Tinubu’s inaugural speech has triggered the biggest rally on immediate assessment since the advent of the current democratic dispensation. Deputy Group Business Editor Taofik Salako examines what keeps investors staking on a better prospects in just four working days of a new administration
The Nigerian capital market is on the upbeat, the kind of optimism never seen before in the immediate days of change of administration since the advent of this democratic dispensation. The inaugural speech of President Bola Tinubu last week triggered a scramble for Nigerian equities, with the stock market posting its best performance in two and half years on the first trading day after the Monday, May 29th inauguration.
Comparative analysis of the first trading day after inauguration of a new president since 1999 showed only three positive marks, with the 5.22 per cent rally for Tinubu, the highest the market has ever witnessed. First day equity market response to the 1999 inauguration of President Olusegun Obasanjo was negative, with the market dropping by 0.07 per cent. The 2007 inauguration of President Umaru Musa Yar’Adua was almost flat, with a tilt towards positive. The 2011 inauguration of President Goodluck Jonathan was greeted with a modest 0.14 per cent. The 2015 inauguration of President Muhammadu Buhari was negative, with a first-day return of 0.77 per cent.
Then, in an all-week rally, the equities market closed the inauguration week with net capital gain of N1.55 trillion. The average return of 5.37 per cent for the week was one of the highest globally, and was mainly responsible for the return of Nigeria to world’s chart of best returns. Benchmark indices for the Nigerian stock market indicated that the gains were entirely due to share price appreciation, rather than primary changes in shares structure such as new listing, re-listing and primary revaluation.
The All Share Index (ASI)- the common, value-based index that is generally regarded as Nigeria’s benchmark equities index, jumped over three steps to close the week at 55,820.50 points as against the week’s opening index of 52,973.88 points. Aggregate market value of all quoted equities at the Nigerian Exchange (NGX) also crossed the N30 trillion mark to close the week at N30.395 trillion as against the week’s opening value of N28.845 trillion.
Market indices
Beyond the obvious increase in momentum of activities, as indicated by almost a double in turnover, the spread of the rally was also a major pointer to the level of optimism. As against instances where few sectors or stocks with significant weights drive the overall market position, the inauguration week’s positive sentiments covered the market.
All sectoral indices at NGX closed the week positive, with the NGX Oil and Gas Index recording the highest gain of 10.46 per cent, driven by strong rally in petroleum –marketing companies. The Tinubu’s address outlined major reform in the oil and gas sector. A former Treasurer of the global oil multinational, Mobil Oil, Tinubu is at home with the private sector and particularly globally renowned for first-hand experience in the workings of the oil and gas sector.
This was a week when the global equities market was buffeted into a largely negative performance by concerns over global growth rate and fiscal challenges. Most advanced and emerging markets’ indices, traditionally tracked as measures of global stock market mood, closed negative. United States’ Dow Jones Industrial Average (DJIA), United Kingdom’s FTSE 100 Index, Europe’s STOXX Europe Index, and the MSCI Emerging Market Index, all closed negative.
While profit-taking transactions are moderating the rally, expected for such quantum of gains, the bullish momentum has held on firmly. All analysts and reputable investment firms were unanimous that the president’s address has brought a renewed wave of optimism on the economy. The capital market is globally regarded as the barometer of the economy, a self-driven, independent assessment of fiscal and monetary outlooks.
Several investment and economic firms have within the past few days issued macroeconomic updates, in reaction to the president’s inaugural address. Such updates situate the market within the context of prevailing socio-economic and political environments, and serve as major guides for investors and the global fund management industry. Professional competence, independence, diversity and long-standing brand reputation make a basket-analysis of updates and reviews, probably, the most profound way to understand the economy or market mood.
Analysts’ reviews
CardinalStone Partners, an investment banking group, in its ‘Nigeria Macroeconomic Update’ highlighted the major drivers from the president’s speech to include security, economy, agriculture, industrial policy, budgetary reforms, electricity, tax review, job creation, fuel subsidy and monetary policy.
CardinalStone Partners outlined that president identified improvement in security and safety as a primary goal with plans on security-related investments in personnel, training, equipment, pay, and firepower.
Analysts noted that the new administration targets Gross Domestic Products (GDP) growth of 6.0 per cent as against the mean of 3.3 per cent in the last two years, would be enabled by several factors including budgetary reform, which aims at stimulating the economy without adversely worsening inflation.
According to analysts, the new president is looking to strengthen domestic manufacturing capacity to reduce import dependence, improve access to electricity by doubling power generation and improving distribution networks, drive greater state government participation in power generation and distribution, review all complaints about multiple taxations, ensure foreign businesses and investors can repatriate profits and dividends through an improved foreign exchange (forex) market and improve focus on the digital economy to harness the power of Nigeria’s youth potential and work with the National Assembly to pass a Job and Prosperity bill, which is expected to create legroom for labour-intensive infrastructure projects, boost light industry, and provide improved social services to the vulnerable.
Additionally, CardinalStone Partners noted that the new administration is looking to leverage commodity exchange boards to guarantee minimum prices for farmers. This initiative is expected to be enabled by a national programme for storage aimed at reducing wastage. The government will also create agriculture hubs across the country to boost production and value-added processing and reduce perennial conflicts over land and water resources in the sector. Ultimately, the government hopes to help farmers earn more where consumers pay less.
Analysts pointed out that the new administration’s blueprint also included prioritization of national network of roads, rail, and ports and the removal of the N8 trillion-a-year fuel subsidy, directly investing the subsidy savings in public infrastructure, education, health care, and job creation.
The president also directly addressed investors’ concerns on multiple taxations, returns repatriation and forex among others. “I have a message for our investors, local and foreign, our government shall review all their complaints about multiple taxation and various anti-investment inhibitions. We shall ensure that investors and foreign businesses repatriate their hard earned dividends and profits home,” Tinubu said, immediately after being sworn in at the Eagle Square, Abuja.
Providing its professional assessment in the impact analysis segment of the update segmented as ‘Our Thoughts’, CardinalStone Partners said it believed the President’s priorities bode well for the near-to-medium-term growth outlook, noting that the drive to leverage Nigeria’s youthful population via planned campaigns to improve the digital economy and promotion of labour-intensive infrastructure projects suggest the likelihood of more inclusive growth and greater employment.
“We see latitude for Nigeria’s long-run trend growth to improve to 6.2 per cent as against 2.2 per cent currently, within the next five years, aided by plans to increase budgetary allocation to education, which could support human capital development and labour productivity, and the resolution of long-dragging security setbacks, which could unlock an additional five percentage points growth in the agricultural sector.
“The tilt to a more market-driven economy is likely to force a re-evaluation of the long-term investment case of Nigeria by providers of patient capital. Hence, we see legroom for improvement in foreign direct investment (FDI) to GDP ratio from an average of 0.8 per cent in the last 10 years to over 2.0 per cent in five years. The effective removal of fuel subsidies could free up fiscal space and support growth stimulation. We also expect support from the Dangote Refinery to drive refining GDP out of recession.
“The President’s commitment to ensuring that foreign investors and companies can repatriate profits and dividends suggest the likelihood of more liberal forex policies. Consequently, we see scope for a downward repricing of the naira to a more manageable level at the Investors & Exporters (I&E) window to compensate for inadequate supply as the Central Bank of Nigeria (CBN) works on a potential unification of exchange rates, in line with the President’s disposition. Notably, the naira traded as high as N632.00 per dollar on Friday, 26 May 2023, possibly indicating a shift in CBN’s forex management stance. In the medium-to-long term, the impact of Dangote Refinery, subsidy removal, and an increase in the foreign portfolio and direct flows could provide material support for the currency,” CardinalStone Partners stated.
Arthur Stevens Asset Management Ltd, a leading investment banking group, in its ‘Macroeconomic Report’ said there was a “hope for the best in terms of economic development and growth from the new administration”, with much positive impact on the capital market.
“The statement made by the President on repatriation of investment and profit will encourage foreign investors in terms of foreign direct investment and foreign portfolio investment, which haves the capacity to make naira to appreciate against dollar and other foreign currency. This is because, one of the factors contributing to consistent depreciation of naira is the scarcity of dollar. The advent of foreign direct investment and foreign portfolio investment will make the economy to be relatively stable as more jobs will be created. When more jobs are created, more revenue will be generated to the government in terms of pay as you earn (PAYE) taxes” Arthur Stevens Asset Management noted.
According to analysts, the administration target six per cent GDP growth implies increase in total monetary value of goods and services produced within the Nigeria economy, with implications for the creation of more jobs.
“The resultant effect will be improvement in the standard of living and welfare of the citizens. There will also be a massive investment in agriculture in other to ensure food availability and sustainability,” Arthur Stevens Asset Management stated.
Managing Director, Arthur Stevens Asset Management, Mr. Olatunde Amolegbe said the pronouncements by the president were “extremely important” to the capital market, noting that “they will impact the economy and the investment market in the short to medium term if implemented as mentioned”.
“The President has hit the ground running. If you are holding fixed income securities at present rates, you better consider holding on to them. We expect influx of foreign portfolio investors into the stock market now that the coast seems clear. So, a bull run might not be far behind. This will be interesting times,” Amolegbe, a former president of Chartered Institute of Stockbrokers (CIS) said.
Cordros Capital, in its review, stated that it believed that the exchange rate unification was a very good initiative to pursue, which should essentially see the official and unofficial exchange rates eventually trade within a close margin which is considered to be optimal, holding forex liquidity constant.
Analysts noted that there might be some panic selling in the near term at the unofficial market, leading to some appreciation of the local currency at the parallel market, but if the official exchange rate is eventually realigned, the exchange rate would depreciate again at the unofficial market, if there are no immediate plans to drive forex inflows. In essence, what then happens afterwards in terms of forex supply will determine how the exchange rate dynamics in the unofficial forex markets play out. Overall, analysts expected volatility in the forex market until the coast is clear on forex supply after the official exchange rate is realigned.
“We also like the PMS subsidy removal given that subsidy removal frees up government resources for other productive uses. Indeed, the President stated that his administration shall re-channel the funds into better investments in public infrastructure, education, healthcare and jobs that will materially improve the lives of the average citizen. Also, given the potential positive impact of PMS subsidy removal on government revenue, we expect to see an improvement in the debt-service-to-revenue ratio, which was 89.5 per cent as at November 2022. Fiscal deficits are also likely to reduce over time if aggregate expenditure does not grow more than the increase in revenue,” Cordros Capital stated.
Analysts at Cordros Capital were however cautious about the possibility of low interest rates regime now.
“While some individuals can find logic in reducing interest rates, for now, we think it will be disastrous when activities eventually normalise. Thus, we think the statement suggests a preference for low interest rates even when low rates are not warranted, likely leading to capital outflows, exchange rate pressures, and worsening inflationary pressures. Perhaps, the country might end up with interest rate A ifurcation such that interest rates for government securities are low but private sector lending rates are high,” Cordros Capital stated.
Analysts noted that while the new administration’s stance and intent to resolve key policy issues will be key catalysts for a better-performing equities market, the policy reforms from the new administration have to be overarching to have a lasting impact on the stock market over the long term.
The NGX ASI is currently undervalued, trading at a Price-Earnings (P/E) Ratio of 9.3 times, a 13.9 per cent discount to its five-year average of 10.8 times, and a 30.1 per cent discount to the frontier market peers – MSCI FM, 13.3 times. Analysts see the undervaluation of Nigerian equities as unjustified, given the market’s higher Return on Equities (RoE) of 19.2 per cent as against MSCI FM return of 16.2 per cent; five-year average of 16.7 per cent and dividend yield of 5.3 per cent compared with MSCI FM yield of 4.9 per cent and five-year average yield of 5.3 per cent.
“On the surface, the speech is positive and contains some bold reforms pronouncements, which would improve both local and foreign sentiments in the near term. However, how long the sentiments will persist will depend on actually acting on those reforms, given the lessons learnt from the previous administration.
“That said, we think proper linkage of some of the reforms is lacking, servicing as a source of concern when the administration eventually embarks on acting on them. For instance, we are unclear on how exchange rate unification will be efficiently done alongside interest rate caps, annual expansionary fiscal policies, and likely continued usage of CBN’s monetary financing,” Cordros Capital stated.
Mr. Taiwo Adeniyi, Group Managing Director of Vitafoam Nigeria Plc, Nigeria’s largest foam-manufacturing company, said the private sector expected a more conducive business environment.
Speaking against the background of the future expansion plans of the group, Adeniyi said growth would be driven by demand and the support of a favourable business environment under the new administration.
“We anticipate a conducive business climate, and we urge the government to provide us with the necessary support and access to production to enable us deliver exceptional products and services,” Adeniyi said, at the commissioning of a new Vitafoam’s Comfort Centre in Aboru, Lagos.
Coronation Asset Management said the president’s address, which contained key issues in his campaign manifesto, further reinforced investors’ expectations that key reforms are underway.
Coronation Asset Management noted that “the market has been by President Bola Ahmed Tinubu’s inaugural address”, pointing out that investors and economic pundits found confidence that “manifesto pledges, which are several months old have made it through to the President’s inaugural address”.
Analysts at Coronation Asset Management said the implementation of the two key reforms of petrol subsidy removal and forex rate unification could transform the momentary rally at the capital market to much longer positive performance.
After a breather of profit-taking on Monday, Nigerian equities rebounded yesterday with average gain of 0.42 per cent, the fifth positive in the six trading days since the inauguration. Investors netted N127 billion in capital gains, with aggregate market value of quoted shares at NGX rising from N30.387 trillion to N30.514 trillion. The ASI crossed another step to 56,038.85 points as against its opening index of 55,806.71 points.
Afrinvest West Africa commended the courage shown by the president’s speech but called for clear roadmap on implementation, based on active engagement of stakeholders.
Afrinvest said “economy reform optimism” bolstered the market performance, noting that the “the rally in the market followed the promise of critical reforms by the President Bola Tinubu administration”.
Chief Operating Officer, GTI Capital Group, Mr. Kehinde Hassan, said the general economic outlook enunciated by the president would herald new thematic growth for the economy.
He said investors appeared favourably disposed to the various initiatives, noting that the market response was a sort of a vote of confidence in the president’s economic direction.
Managing Director, APT Securities and Funds Limited, Mallam Garba Kurfi, said the market was responding to the expectations of reforms implied in the president’s address.
“The speech is excellent, especially as regards converging exchange rate into one; that will attract inflow of foreign Investors. The removal of fuel subsidy will attract more investments in the refineries and removal of double taxes will also bring more Investments into the country, and all these will reduce unemployment and increase productivities,” Kurfi said.
FSDH Merchant Bank Group also attributed the recent rally to the inaugural address, poiting out that the policy announcements in the speech were the fillips behind the market’s rousing performance.
“Following the announcement, investors’ interest increased as they hoped for an improvement in fortunes at the forex market, which is expected to trigger foreign investor interest in Nigerian equities,” FSDH stated.
Analysts at FSDH were however cautious about the long-term run of the bulls, based on the basket of policies needed and the implementation.
“From our standpoint, we are cautious about the likely return of foreign portfolio investors (FPIs) to the Nigerian market, despite the recent policy announcements. First, removing fuel subsidies is unlikely to improve the forex situation. Nigerian National Petroleum Company Limited (NNPCL) remains the sole importer of PMS and will continue to rely on crude oil dollar proceeds to fund importation. Thus, while NNPCL recovers the full cost of importing PMS in naira terms, its forex obligation remains unchanged, removing any hope for net FX gains,” FSDH stated. But the new government’s policy direction favours a deregulated market with multiple importers and sources, with major investments from foreign and domestic investors with private capital needed to fund such requirements.
“The most impactful of the new policy announcements will be the decision to unify the exchange rates. It remains unclear what the timeline for accomplishing this would be, but we suspect the unification will likely occur in the N600 per dollar to N680 per dollar range. This will introduce much-needed transparency in the forex market and improve liquidity. However, the policy’s degree of success would depend on a culture change among individuals that prefer to hold wealth in foreign currencies. Ultimately, while we see a case for improved forex liquidity after the exchange rate unification, we are cautious about attracting adequate forex to provide confidence for foreign investors that their dollar demand will be met whenever they need to repatriate funds. Bearing in mind the backlog of forex payments to investors that still need to be cleared.
“On a brighter note, we regard the policy announcements from the federal government as ‘positive body language’ on willingness to push through tough economic policy reforms. This will eventually encourage foreign investors to return to the Nigerian financial market,” FSDH stated.
FSDH however cautioned that the current bullish momentum built on expectations of FPI return could fizzle out, urging investors focusing on investing in long-term value-delivering companies to continue to build positions for long-term value creation.
As the economy awaits key government appointments and comprehensive roadmaps on the key policy initiatives, there’s a consensus that the Tinubu’s administration has started with a groundswell of goodwill and optimism from the investing public. Will the early hopes metamorphose into ‘renewed hope’ promise of Tinubu’s manifesto? There is no doubt that meticulous implementation of policy reforms and the extent of energy and harmony in the much-expected Tinubu’s team will play important roles in the medium to long-term assessment of the new government.
