Investors in the Nigerian equities market saw a roller coaster ride in 2022, with inflation taking the shine off their returns on their holdings.
Though the market looks set to close higher this year, considering its return of 16.36 percent as of December 23 compared to 6.7 percent in 2021, the country’s elevated inflationary environment is depriving investors of real returns.
The headline inflation rate quickened to a 17-year high of 21.47 percent in November from 15.63 percent at the end of last year, according to the National Bureau of Statistics.
Amid improved liquidity and new listings, the record gain in the stock market was driven majorly by domestic institutional and retail investors who reinforced the potential of Nigerian investors in stabilising and growing the market.
High inflation has historical correlation with lower returns on equities. While value stocks tend to perform better than growth stocks in high inflation periods, growth stocks tend to perform better during low inflation.
A combination of new listings and record rally in some stocks helped push the value of listed stocks on the Nigerian Exchange Limited (NGX) up by N4.77 trillion in 2022 to N27.07 trillion. Listed stocks value had closed 2021 at N22.29 trillion.
The NGX All-Share Index rose to 49,706.09 basis points (bps) on December 23.
Notwithstanding the risks to equity market rally in 2022, Nigerian stocks are still attractive and should remain resilient in 2023, according to analysts.
Analysts speak
Analysts at United Capital Plc have said foreign portfolio investors remain discouraged on the back of hawkish monetary policy in advanced economies, negative real rate of return in Nigeria, rising election tensions and the earlier mentioned FX concerns.
“Lack of a transparent and liquid FX regime, weak macroeconomic fundamentals, worsening debt situation and rising political risks are all issues that will limit FPI flows over the medium to long term,” they said in a December 15 note to investors titled ‘Foreign capital investment: Dwindling interest from investors’.
Vetiva analysts said in their Macroeconomic Outlook for 2023 that amid the rise in inflation, monetary policy has remained largely contractionary as the central bank stepped up its inflation-fighting tools in 2022.
They said: “Just as we predicted in our FY’2022 and H2’2022 outlook reports, the apex bank would be forced to step down its pro-growth stance, which favoured low interest rates amid interventions in the Nigerian economy.
“The Russia-Ukraine war incited inflation across the globe, with central banks in advanced economies leading the hawkish ride. The Central Bank of Nigeria had to follow suit despite stating earlier that the country was immune to capital flow reversals from the liquidity glut of 2020.”
They said the apex bank had to raise rates by 500bps to 16.5 percent, the largest annual rate adjustment in 11 years, adding that the Cash Reserve Ratio was raised by 500bps to 32.5 percent.
“In 2023, we expect three factors to influence monetary policy: global supply chains in relation to the war in Ukraine, pace of monetary policy normalisation in advanced economies, and the decision on fuel subsidy,” Vetiva analysts added.
Hawkish stance makes equities less attractive
To tame the rising rate of inflation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria adopted a hawkish stance in 2022 by raising its key interest rate four times, a development that made fixed income investors more attractive than equities.
In 2022, the policy rate was hiked by 500bps from 11.5 percent in January 2022 to 16.5 percent in November. The MPC is scheduled to hold its next meeting in January 2023.
The impact of the recent 100bps rate hike was expected to surface in the local bourse, as investors looked to book profits from record rally.
Read also: Inflation forces Nigerian households to cut Christmas spend
Fixed income market yields were expected to continue to respond to the MPC’s persistent policy tightening, driving renewed interest from investors at the detriment of the equities market.
Despite that huge leap in the interest rate environment undermined funds flow to equities, positive corporate earnings reinforced investors’ interest in value stocks.
Domestic investors still king
In the 11 months to November 30, 2022, equities worth N2.18 trillion were exchanged on the Nigerian bourse, compared to the N1.74 trillion recorded in the same period in 2021.
Out of the record equities transactions in the period, N364.02 billion worth of transactions, representing 16.67 percent, were carried out by foreign investors, domestic investors accounted for N1.82 trillion worth of transactions, representing 83.33 percent.
Domestic retail investors accounted for N607.45 billion worth of transactions, while domestic institutional investors carried out equities transactions worth N1.21 trillion.
The transactions by domestic retail investors were worth N540.38 billion, while their institutional counterparts traded equities worth N801.4 billion in the period under review.
In the corresponding 11 months in 2021, foreign investors’ transactions on the Nigerian bourse were worth N399.18 billion or 22.93 percent, while domestic investors’ transactions were worth N1.34 trillion or 77.07 percent.
Foreign inflow into the Nigerian stock market was N187.12 billion in the 11-month period while foreign outflow was N176.90 billion.
Foreign inflow in the same period of 2021 was N189.42 billion while foreign outflow was N209.76 billion.
