Stock investors are betting on Nigeria to speedily turn the corner on a scathing economic recession and are wasting no time in taking positions.
Stocks extended last week’s rally to settle at a near 2-year high on Monday, led by gains in cement, fuel retailing and banking shares, according to data compiled by BusinessDay and sourced from the Nigerian Stock Exchange (NSE).
The benchmark index rose 4 percent to cross 32,000 points in early trade, with Dangote Cement- which accounts for a third of the market’s value- surging 8.85 percent.
Nigeria is in its second year of a recession, after output contracted by 1.5 percent in 2016. Stocks plunged to record lows in the period and investors lost money.
In recent weeks, however, the equity market has witnessed a rebound and has returned 16.7% Year to date (Ytd) following increased foreign participation (now at 45.84% vs. 40.83% in 2016 Ytd).
The rally mirrors optimism of an economic recovery, according to Tajudeen Ibrahim, head of research at Chapel Hill Denham.
A stock market rally bodes well for the economy, as listed companies would have more liquidity to embark on expansion plans and create jobs.
Nigerian stocks at 23-month high
Source: Bloomberg, BusinessDay Research
“The Q1 numbers may be negative, but the economy is improving and investors are taking advantage of low stock valuations in expectation of good tidings,” said Ibrahim.
“The new PENCOM guideline may have also had a hand in the rally as PFAs raise their equity holdings,” Ibrahim added.
A pickup in oil prices and production, as well as a more stable currency have improved economic prospects in Nigeria, prompting investors to buy into the stock market.
The Purchasing Managers Index (PMI), a gauge of business confidence and manufacturing activity, has been above 50 points in the last three months, according to data by FBN Quest which releases a monthly index. In May, PMI was 54 points.
Inflation has also cooled from an 11-year high, falling further to 17.24 percent in April, while company profits are looking up.
Beyond the improving economic indices, stocks are surging on the back of the newly introduced window that allows investors to buy and sell dollars more easily, according to Pabina Yinkere, head of institutional business at Lagos-based Vetiva Capital.
The window, the Investors’ and Exporters’ (I & E) window as is called, opened on April 24, and officials say it is easing a scarcity of foreign exchange in Africa’s biggest economy.
The naira gained less than 1 percent to N377.42 per US dollar on Monday at the said I & E window.
“The newly introduced Investors’ and Exporters’ window has boosted foreign participation in the market and is a major driver of the rally,” Yinkere said.
Meanwhile, Morgan Stanley Capital International (MSCI) on Monday, increased the weighting assigned to Nigerian Stocks in its Frontier Markets Index to 7.9% from 6.5% previously.
The increase in the weighting followed Pakistan’s move to the Emerging Markets Index from the Frontier Markets Index.
Nigeria is currently under review for a potential reclassification as part of the MSCI 2017 Annual Market Classification Review, after the liquidity issues in the country’s FX market elicited concerns.
However, with the introduction of the Investor/Exporter (NAFEX) window, FX liquidity for portfolio investors has improved.
According to FMDQ, total value of transactions at the NAFEX window is about $1.9 billion, with average daily value of trades around $80 – $100 million.
Analysts at investment firm, Cardinal Stone Partners, are optimistic that Nigeria will be retained in the MSCI Frontier Markets Index when a decision is finally announced later this month.
“The announcement could set the stage for a further rally, considering that many of the funds that track the index may still be underweight,” Cardinal Stone said in a note on Monday.
“Valuations are still attractive despite strong rally – We think valuations are still attractive even with the ongoing rally in the market.
“Nigerian banks for instance are trading at an average price-to-book ratio of 0.7x compared to a 1.4x P/B for its Middle East & Africa peers.
“Also, when compared to pre-2014 crash levels, there’s still a decent upside for many fundamentally sound stocks,” Cardinal Stone said.
Africa’s largest economy, grappling with a currency crisis brought on by low oil prices which hammered its foreign reserves and created chronic dollar shortages, has resorted to regular injections of dollars by the central bank to narrow the spread between the official and black market rates.
The naira has rallied on the black market to 375 from around 520 per dollar before the central bank started aggressive intervention in the foreign exchange market in February to improve liquidity and ease pressure on the local currency.
“The increase in the supply of foreign exchange, improved crude oil production and prices, improved investor confidence in the economy and an increase in the participation of both local and foreign investors in the market,” have been driving the market’s recent gains, said FSDH Merchant Bank in a research note to clients.
LOLADE AKINMURELE
