Investors’ reactions to the policy direction and reforms of the new government have been optimistic. While downside risks remain and caution is a refrain to many, sustained positive sentiments at the investment market underline investors’ approval of President Bola Tinubu’s reforms. Deputy Group Business Editor, Taofik Salako reports.
Nigeria’s stock market opens today with average return of 31.76 per cent, one of the three highest returns globally. The average year-to-date return of 31.76 per cent for Nigerian equities implies that investors have earned about N8.87 trillion in net capital gains so far this year.
The sustained rally at the Nigerian equities market has been driven mainly by post-inauguration enthusiasm that started with the May 29, 2023 inauguration of President Bola Tinubu.
On the eve of the inauguration, Nigeria’s equities index’s year-to-date return was barely 3.36 per cent, equivalent to about N938 billion.
The benchmark stock index is globally regarded as the primary gauge of investors’ mood and reaction. It is also regarded as the barometer for the economy, mirroring the general notion that the capital market illustrates the general economic outlook.
On the eve of the new administration’s 100 days in office, investors remained optimistic and supportive of the administration’s policy directions and decisions. The 100-day period has seen consecutive monthly increase in Nigeria’s benchmark index. It reached an all-time highest level earlier last week, exceeding the previous record set in the “boom period” in March 2008.
The All Share Index (ASI)- a value-based common index that tracks all share prices at the Nigerian Exchange (NGX), is widely regarded as Nigeria’s sovereign equities index, a barometer of pricing trend and investors’ return at the nation’s stock market.
The ASI opened today at 67,527.19 points compared with 52,403.51 points recorded on the eve of the inauguration and 51,251.06 points recorded at the beginning of the year. The ASI’s previous highest index point was 66,371.20 points recorded on March 05, 2008.
Aggregate market value of all quoted equities at the NGX opened today at N36.958 trillion, N8.11 trillion above N28.845 trillion recorded on the eve of the new government’s inauguration. It had opened the year at N27.915 trillion.
A general analysis of the pricing trend at the stock market indicated a market-wide rally, with all sectoral indices above world’s average. From financial services to manufacturing and oil and gas, investors were largely upbeat across the sectors. The NGX Banking Index, NGX Oil and Gas Index and NGX Consumer Goods Index, three indices that indirectly track the major reforms of the new government, closed weekend at average year-to-date return of 62.06 per cent, 103.36 per cent and 83.13 per cent.
The momentum of activities at the stock market followed the same trajectory with the pricing trend, further reinforcing the bullish sentiment at the market. Share price change at the Nigerian market is dependent on specified volume of activities, thus price change is effectively driven by market forces. Transactions at the market have reached a record highpoint. The high-value trading pattern suggests that trading is being driven by the buy side than the sell side.
In other words, increase in investors’ demand allows sellers to optimise their sell orders at higher prices, thus ensuring that deals are closed at premium price. The stock market operates a 10-per cent daily share price movement range, a band within which a share price can rise or fall in a day.
Trading data at the NGX indicated that transactions rose by 22 per cent to cross the N2 trillion threshold to N2.15 trillion in the first seven months of this year. This is the best performance in 10 years, since 2014 that the NGX started publication of its monthly foreign portfolio investment report, a general report that captures transactions by local and foreign investors at the market.
The report, for the period ended July 31, showed that total transactions for the seven-month period increased to N2.154 trillion in 2023 as against N1.763 trillion recorded in the comparable seven-month period of 2022. A monthly analysis of the trading values showed that the 2023 performance was also largely driven by post-inauguration rally.
Total transactions for the first four months of 2023 stood at N721.44 billion, slightly above N702.98 billion recorded in July 2023 alone. Total transactions for the three-month period of May to July 2023 stood at N1.433 trillion, about 99 per cent above total transactions in the first four months and 66.53 per cent of total transactions so far this year.
The further segmental analysis of the report indicated considerable improvements in investors’ sentiments. Domestic retail investors’ turnover has risen by about 32.7 per cent in 2023 compared with similar period of 2022 while domestic institutional investors’ turnover rose by 31.9 per cent.
The report also showed improvement in foreign portfolio investments, with a trading pattern that suggests foreign investors were taking advantage of the relative ease in access to foreign exchange (forex) and the high returns at the Nigerian market to run a profit-taking trading pattern. For instance, while foreign inflows saw remarkable improvements from the recent lows in May and June, foreign outflow was substantial in July 2023.
But largely, foreign investors appeared to have taken initial note of the reforms, although several analysts expected foreign investors to tarry awhile in the usual “wait-and-see” attitude of measuring the stability of a policy direction.
A report on foreign portfolio investments (FPIs) by the NGX showed an all-positive mark for the investment market with increased transactions by foreign and domestic investors in second quarter 2023. Foreign portfolio investors were also retaining more funds in the market, reversing the negative situation in the previous months when there were more outflows than inflows.
Total foreign transactions rose by 70.1 per cent in the second quarter 2023 as against first quarter 2023, driven by 197.5 per cent increase in inflows. FPIs net status- the difference between outflows and inflows, changed from a deficit of 49 per cent in first quarter 2023 to a surplus of 43.9 per cent in second quarter 2023.
The performance in the second quarter was driven largely by a dramatic recovery in foreign interest in May, which continued in June; supporting equally ecstatic performance by domestic investors.
The report indicated retail domestic transactions increased by 40.70 per cent from N88.50 billion in May to N124.52 billion in June 2023, showing that more individual Nigerians were optimistic about the economy despite the immediate challenges that greeted major policy changes. Institutional composition of the domestic market increased by 19.9 per cent from N197.26 billion in May 2023 to N236.49 billion in June 2023.
Total FPIs transactions rose from N53.71 billion in first quarter to N91.37 billion in the second quarter. FPIs inflows tripled from N18.12 billion in first quarter to N53.9 billion in the second quarter. Total FPIs outflows, which had stood at N35.59 billion against inflow of N18.12 billion in first quarter, was less significant at N37.47 billion against an inflow of N53.9 billion in the second quarter.
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Month-on-month analysis showed that total transactions at the NGX rose by 26 per cent from N322.92 billion in May 2023 to N406.75 billion in June 2023. Total foreign transactions increased by 23 per cent from N37.16 billion in May to N45.74 billion in June. Total domestic transactions remained upbeat, rising from N285.76 billion in May to N361 billion in June 2023.
There is analysts’ consensus at the stock market that the bullish trend witnessed in recent period was driven partly by positive investors’ perception of the pro-market stance of the Tinubu administration.
The NGX stated that experts’ opinions on the strong performance of the market were that the bullish trend was due to “a combination of factors, including investor sentiment influenced by macroeconomic developments such as the formation and swearing-in of the economic cabinet by President Bola Tinubu”.
The NGX had also attributed the market performance to the “audacious macroeconomic reforms under the new administration” of Tinubu.
According to the NGX, market operators were of the view that “the policies of the new administration under President Bola Tinubu” had “led to the rise in the fortunes of investors”.
Chief Executive Officer, Nigerian Exchange (NGX), Mr Temi Popoola, said the market was optimistic that the “proactive stance” of the Tinubu’s administration gives hope that many innovations and developmental initiatives could be pushed through. These include a proposal to create a platform for issuance and listing of dollar-denominated debt and equity issues at the Nigerian market.
Under the proposed, two-phased plan, the NGX plans to start with quotation of dollar-denominated debt issues such as bonds and then move to listing of dollar-based ordinary shares and other quasi-equities.
“Given the proactive stance of the current administration, it is reasonable to anticipate that these objectives can be achieved,” Popoola.
According to him, changes to listing regulations can be achieved within a “relatively short time”.
“It could potentially address the challenges posed by fluctuations in foreign currency,” Popoola said, underlining the ability of the government to draw private sector support for its reforms. Foreign exchange (forex) management is a major challenge for Nigeria, with unmet forex demand and low forex earnings orchestrating a highly volatile market situation.
Nigeria’s apex capital market regulator, Securities and Exchange Commission (SEC), has already given a provisional “no-objection” to the dollar-listing proposal. SEC stated that the entire capital market ecosystem shares optimism that the Tinubu administration would lead to significant improvement in the economy.
Director-General, SEC, Mr. Lamido Yuguda, who spoke after a stakeholders’ meeting of the capital market, said there was general optimism that ongoing reforms would rejuvenate the economy and lead to a brighter future for the country.
No fewer than 277 stakeholders attended the meeting of the Capital Market Committee (CMC), a consultative assembly of stakeholders in the capital market. Attendees included management and senior staff of SEC, capital market operators (CMOs), representatives of relevant government agencies including the Central Bank of Nigeria (CBN), Debt Management Office (DMO), Federal Inland Revenue Service (FIRS), Investments and Securities Tribunal (IST), National Insurance Commission (NAICOM), National Pension Commission (PENCOM), and Financial System Strategy 2020 (FSS2020).
Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said the market performance reflects the expectations of the investing public on the ongoing reforms.
“The stock market is a forward pricing mechanism, so it’s no surprise that we are seeing this positive momentum in stocks’ prices .The market is essentially saying that despite our present gloomy circumstances, the future looks promising with the policies that have been implemented so far and those that are proposed,” Amolegbe, a former president, Chartered Institute of Stockbrokers (CIS) said.
Afrinvest West Africa (AWA) Limited, a leading investment banking group, which had initially projected modest return of 7.3 per cent for the Nigerian equities market in 2023, has revised its projection upward to average full-year return of 37.3 per cent.
According to the investment firm, the revision was due to the market rally ushered in by the Tinubu administration.
“In the equities market, we anticipated a modest return of 7.3 per cent in 2023 to be driven by cautious trading amidst political transition and fiscal and monetary policy reforms. However, at the end of first half 2023, the equities market posted a gain of 19 per cent, outperforming by 11.7 percentage points.
“The positive first half performance was inspired by a late market rally in May and June, following positive market reaction to the market reforms of the new administration. Notably, foreign portfolio investment (FPI) inflows increased by 338.7 per cent to N37.2 billion, the highest since June 2022, in May 2023,” it added.
“Consequently, we have revised our scenario-based projections for the equities market to reflect current market dynamics. On a base case, we envisage a 37.3 per cent return in 2023,” Afrinvest stated.
Cordros Capital stated that the equities market resilience reflects heightened investor optimism for domestic growth with the new administration’s long-needed policies.
According to analysts at Cordros Capital, the implementation of policy reforms, accommodative monetary policy and resilient corporate earnings have so far supported buying activities at the market.
Managing Director, Highcap Securities, Mr, David Adonri, said beyond the current rally, concerted efforts should shift to re-activating the largely dormant primary issue segment of the market. With most companies resorting to short-term debt issues, the dearth of initial public offerings (IPO) and other equity issues has left the market in a sort of imbalance.
Adonri said while the excitement in the market is noticeable, there is a bit of caution and worry that a dormant primary market could be counterproductive, thus the need for policy reforms that encourage primary market activities.
Staying through the reforms, despite pockets of resistance, may drive the initial enthusiasm into a lasting catalyst for far-reaching economic growth. Analysts have established strong linkages between the key reforms and the desirable goals of stable forex, capital flow, domestic investment and headline infrastructures.
Head of Markets for Sub-Saharan Africa, Citigroup Inc, George Asante, said the key reforms of forex adjustment and removal of petrol subsidy make good investment case for Nigeria. Tinubu had at the onset of his administration removed the corruption-ridden petrol subsidy and encouraged the Central Bank of Nigeria (CBN) to abolish arbitrage-prone multiple official forex rates, in favour of a single, ‘market-driven’ market.
According to Asante, the removal of petrol subsidy was a very important reform for Nigeria, while moves to merge multiple exchange rates will also help to boost liquidity.
He explained that the next task for the government is to make sure the official forex market can function smoothly in the wake of the changes.
“I believe that this will be a significant catalyst for flows back into the Nigerian market,’’ Asante said.
For Tinubu, the biggest palliative is reigniting the hope in a market economy, with more than N8 trillion added to the fortunes of Nigerian investors in three months.
