The stock market is riding on a new found momentum that has seen it touch new highs at the end of last week. Both the All Share Index (ASI) and the market capitalisation hit a new 11-month high as at the close of trading on Friday, June 2, 2017.
At the close of trading on Friday, which was also the first day of trading in June, the ASI rose 2.8 percent to close at a new 11-month high of 30,314.1 points while the market capitalisation was up N282 billion to a new 11 month high of N10.5 trillion.
Since the Central Bank of Nigeria (CBN) introduced a new foreign exchange window on April 24 that allowed a more market determined exchange rate for the Naira for investors and exporters, the stock market has taken flight. The market is estimated to have gained more than N1.41 trillion since the CBN initiative. The new window, which is open to investors and exporters of goods and services, has seen dollar trades in excess of US$1.1 billion. While the official exchange rate has remained at an average of N305 to the US$, in the new CBN investors and exporters window, the naira closed on Friday at N380.20, a significant difference of N75.
Basically, by opening the new window, investors can now bring in their dollars into Nigeria to buy financial assets at about 25 percent discount to the official rate. The window has thus made financial assets about 25 percent cheaper.
Renaissance Capital, in an investor note on 26 May, acknowledged that the new investor and export window has actually made financial assets in the country cheap and attractive while recommending that investors start buying Nigeria’s financial assets including equities and bonds.
Investors have taken the advice to heart piling into both the stock and bond markets. Banking stocks, especially tier 1 banks have actually seen a significant inflow of cash.
The banking index is already up 31 percent this year, outperforming the ASI which is up about 9.1 percent within the same period after reversing the negative return it recorded in the first quarter of the year.
Some big banking stocks have contributed to the significant gains seen in banking stocks. GTBank is already up 45 percent this year, with the bank’s market capitalisation crossing the N1 trillion mark. Zenith Bank, which is the second largest bank by market capitalisation, has also seen its share price rise significantly by 32 percent.
Other tier banks that have seen their stock price witness significant gains include; UBA, which has seen its share price rise 71.5 percent, Stanbic IBTC, by 78.3 percent, Access Bank by 34.5 percent, and FBN Holdings by 57.6 percent. Outside the banking stocks, companies listed in the cement sector led by Dangote Cement, as well as agriculture have also seen significant rise in their share prices.
But it is not just inflows from offshore investors driving the stock gains even though inflows from foreign investors into the stock market turned positive for the first time in April, with a net positive inflow of about N14 billion. Domestic institutional investors and pension funds are also buying into the Nigerian stock market having noticed the cheap valuations while also taking position ahead of the return of foreign investors.
However, besides speculation, there are also strong fundamentals driving the upturn in the market, especially for banking stocks. Profit after tax for quoted banks was up 36 percent in the first quarter of 2016 despite the fact that most banks had to make significant provisions for bad loans.
In the non-banking sector, there are also signs that most of the firms have overcome the challenges that they had accessing foreign exchange and raw materials in 2016. The Purchasing Managers Index (PMI) has largely been expanding into the positive territory this year, which has been linked to the increase in foreign exchange sales by the CBN to end users.
Meanwhile, the difficult period most banks and firms faced in 2016 also resulted in their stocks trading below their book values or just at par with their book value, effectively eroding their value.
Now there is rising optimism that the Nigerian economy has also put its worst performance behind it. Even though the economy still contracted in the first quarter of 2017, the contraction was less that in the same period of 2016 and also better than the contraction in the last quarter of 2016. There is hope that the economy will now be out of recession by the third quarter of this year provided current policies are not reversed and crude oil prices remain above US$50.
Chances that Crude oil prices will remain above US$50 is high while there is optimism that CBN, having seen how positive the investor and export window has been to the economy would rather strengthen the window than do anything to shake confidence in that end of the market. It is also hoped that the apex bank would eventually collapse the other markets into the investor and export window and allow a single exchange rate dictate transactions in the economy.
But the big question is how sustainable is the current bullish run in the stock market? No one really knows or they would be smiling to the bank. Most analysts believe some of the stocks have already crossed their fair value.
But this is debatable considering that many of the stocks, despite the significant gains in recent weeks, are still selling at a discount to their book value or just at a slight premium above their book values.
Price to earnings ratio in the Nigerian market is still low when compared to emerging market peers. Besides, for many stocks, the share price gains recorded in the last few months have not been steep enough to compensate for the devaluation of the naira. The effective devaluation of the naira in the investor and export window means that most stocks are trading at about half the pre-devaluation levels in dollar terms.
The expectation is that stocks with unchanged strong fundamentals should have their prices restored to the pre-devaluation levels. If this holds, stocks with strong fundamentals could still have significant upside.
Anthony Osae-Brown
