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Stock investors booked higher profit than bond investors in October, as the All-Share Index (ASI) gained 36.49 per cent as at October 31, almost double the 18.46 per cent effective yield on 364-day Treasury Bills, according to data compiled by BusinessDay.
The return on stocks has now outperformed bond yields since April 2017.
Analysts tip the trend to continue this year and into 2018, as Nigeria’s economic fortunes improve.
’Stocks will outperform bonds as inflation cools and interest rates moderate,” said Tajudeen Ibrahim, head of research at Lagos-based investment firm, Chapel Hill Denham. Inflation slowed for the eighth successive month to 15.98 per cent in September, amid forecast for further declines in the coming months.
“The Central bank has signalled a rate cut in coming months to accommodate an expansionary stance, and as the market continues to price in that information, bond yields will only continue to slide while equities are likely to rally, as companies negotiate lower interest rates from lenders,” Ibrahim said by phone.
READ ALSO: Bank stocks gain by most in 3 months after CBN slashes interest rate on deposits
The Monetary Policy Committee held benchmark interest rate at 14 per cent for the sixth successive meeting in September but signalled a rate cut in the near term to support economic recovery and encourage lending to the real sector.
The stock market was dealt a blow last year when Nigeria suffered its first economic recession in a quarter of a century and corporate profits headed south.
The Nigerian Stock Exchange (NSE) was the worst performer among global peers in 2016, according to Bloomberg data, as investors dumped stocks for bonds in the hunt for positive and secure returns. An economic downturn usually triggers appetite for government bonds, which are perceived as low-risk investments.
One-year Treasury bills, the highest yielding of this asset class, returned as high as 18 per cent last year, while stocks returned -6.1 per cent as at the end of the year.
However, the economy has since turned the corner, expanding for the first time in six quarters, following a 0.5 per cent growth in the three months through June, according to data provided by state-funded data agency, the National Bureau of Statistics (NSE)
Stocks have also enjoyed a rebirth, thanks to a recovering economy and the creation of the Investors and Exporters window in April.
The window, which opened on April 24, is easing a scarcity of foreign exchange in Africa’s biggest economy and has handled almost $18 billion since inception, boosting foreign buying in banking and consumer goods stocks which now sit at near three-year highs.
“The I & E window has breathed new life into stocks and there is still some way to go for stocks as the economy turns the corner,” said Ayodele Akinwunmi, head of research at FSDH merchant bank. Akinwumi added that the high risk in stocks puts it at an advantage to deliver higher gains compared to government bonds which are risk-free.
The I&E window provides the best measure of the market value of the naira and is encouraging foreign investors who fled the market in the period of capital controls by the CBN to return.
The naira appreciated 0.14 per cent to N360.05 per US dollar Monday, according to FMDQ data.
READ ALSO: Treasury yields remain flat despite MPC rate cut
The latest NSE foreign investment report shows that foreign investment in the stock market expanded 3.4 times to N208 billion (c.US$58million) in August, the largest monthly investment in 2017. In September it cooled 60 per cent to N84 billion.
Importantly, monthly net foreign investment inflow in the stock market has been consistently positive since April.
The All Share Index fell 0.02 per cent to 36,930 Monday, according to NSE data, but the year to date return is 37.42 per cent, the highest return among sub-Saharan Africa peers. The Johannesburg Stock Exchange’s year to date return was -18.89 per cent Monday, while the Nairobi Securities Exchange returned 22.31 per cent.
The diamond bank led the gainers’ chart on Monday, after gaining 9.43 per cent to close at N1.16, while Champion Breweries topped the losers’ chart, shedding 4.92 per cent to close at NGN2.32.
The banking index gained 0.19 per cent and industrial stocks rose 0.003 per cent. Insurance, oil & gas stocks declined by 0.80 per cent, 0.65 per cent and 0.20 per cent respectively.
“In the coming week, we expect further sell pressures on some heavily weighted stocks in the consumer goods space, as well as some stocks in the banking and industrial goods space which appreciated in the previous week.
“Overall, we expect a reversal in the current bullish market mood as investors sell down on some stocks that have recorded significant gains. Hence, we anticipate the market to close down week-on-week,’ analysts at Lagos-based investment bank, Meristem Limited.
Meanwhile, the yield on one-year Treasury bills maturing in January 2018 fell 0.01 per cent to 18.83 per cent Monday, according to data available the FMDQ website, as expectations for lower yields continue to spur demand.
The true yield on the 364-day T-Bill is now 476bps below the peak of 23.4 per cent on 19 April, while the yields of 13.7 per cent and 16.8 per cent on the 91-day and 182-day T-Bills are 80bps and 238bps below their YTD high levels of 14.5 per cent and 19.2 per cent on 04 January and 05 July respectively.
The moderation in yields implies lower funding cost for corporates that plan to raise debt capital or issue commercial paper (CP) to buffer liquidity positions, which in itself is another boost for equities.
LOLADE AKINMURELE, DIPO OLADEHINDE, ANI MICHAEL, ENDURANCE OKAFOR, BUNMI BAILEY & ETHEL WATEMI
