Nigerian stocks go from hero to zero

Ademola Lookman, a 30-year-old Nigerian engineer, was a happy man in June. His local stock portfolio was up by around 18 percent, thanks to a collection of consumer goods and banking stocks he held.

The Nigerian stock market seemed to have been eluded by the global stock market downturn.

Fast forward five months and Lookman’s portfolio is down by 2 percent.

“My investment banker said the worrying rise in inflation finally caught up with the stock market with interest rates having to go up,” he told BusinessDay.

“I don’t have any regrets, however, as I am a long-term investor who is in the market for the long haul; so I’m not bothered by these types of movements,” Lookman, who has been investing since he was 19 years old, said.

A blockbuster 21 percent average return in the first half of 2022 made Nigerian stocks one of the best performers, sidestepping a global stock market downturn.

Read also: Here’s why investors are fleeing stock market

Among the 10 biggest stock markets in Africa, nine were in negative territory at the end of June 2022. Ghana and Egypt were tied with negative returns of 32 percent while Kenya was down by 30 percent, erasing $6.5 billion of investors’ funds. South Africa, Botswana, Morocco, Mauritius and Tanzania all closed the half-year period with losses.

Emerging equities posted their largest first-half drop since the 1998 Asian financial crisis, with the MSCI benchmark down 17 percent at the end of June, while China, the index’s single biggest component, was down 12 percent.

The fortune of Nigerian stocks which was very different at the time has however quickly changed.

The Nigerian stock index was up 4.16 percent year to date as of November 18, down by nearly 2,000 basis points.

The decline is after a raft of rate hikes by the Central Bank of Nigeria (CBN) cut short what was a bull run by stocks and triggered a rotation of capital from the equities market to higher-yielding bonds.

“The stock market’s loss has been the bond market’s gain,” said Ayodeji Ebo, managing director of Optimus by Afrinvest, an investment bank. “The interest rate hike by the CBN has led to a reversal of flows from stocks to bonds.”

The CBN has hiked interest rates by a combined 400 basis points in 2022, starting from a 150 basis points hike in May to 13 percent from 11.5 percent. In July, the apex bank struck again with a 100 basis points hike to 14 percent before topping that with another 150 basis points hike in September to 15.5 percent.

The rate hike, which the CBN hopes will help tame rising inflation, has taken borrowing costs to the highest level since 2006.

Typically, interest rate hikes tend to have a knock-on effect on stocks. When rates rise, stocks fall, as investors price in the higher cost of borrowing for companies.

It wasn’t until July, the month of the second interest rate hike, that the stock market started feeling the impact of the rate hike.

The stock market index dipped by 2.82 percent as of the end of July 2022 and would remain bearish till date. Between August and September, the market dipped by 5.6 percent as yields in the bond market continued to rise.

By the end of October, the Nigerian Exchange All Share Index had declined by another 10 percent, wiping out most of the gains recorded in the course of the year. The oil and gas index, which had been buoyed by high oil prices, saw a rare dip of 4.77 percent in the period, even though it was still up by 40.29 percent on a year-to-date basis, conveniently outperforming the broader index.

Expectations of yet another interest rate hike by analysts polled in a BusinessDay survey may mean there’s more pain to come for stocks.

The Monetary Policy Committee enter a two-day meeting on Monday (today), with concerns about rising inflation and an embattled naira weighing on their minds.

The outlook for higher interest rates ahead of the Nigerian presidential election next February also presents itself as a negative for the stock market.

While some analysts think this may be an opportunity to buy the dip, others are careful not to advise investors to catch a falling knife.

Most analysts polled in a BusinessDay survey said the stock market may continue to struggle till at least the second quarter of 2023.

The lack of economic reforms and an acute dollar shortage that has blocked foreigners from the market have also negatively impacted Nigerian stocks.

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