Nigerian stocks seen rallying in 2024 at slower pace

The rally seen in the Nigerian stock market in 2023 for the first time in an election year since 2007 is expected to continue into 2024 but at a slower pace.

The market finished last year with a return of 45.90 percent, more than double that of 2022 and the highest in three years, data compiled by BusinessDay show. The last time Nigerian stocks rallied in an election year was 2007, when the main index surged 74.77 percent to 57,990.22 basis points (bps).

Several analysts and industry watchers attributed last year’s robust performance to the reforms implemented by the President Bola Tinubu, corporate earnings and new listings on the Nigerian Exchange Limited (NGX). The reforms however failed to lure back foreign investors as inflows dropped while outflows rose as of November amid lingering foreign exchange scarcity in the country.

Investors reaped N13 trillion in capital gains as the market capitalisation of equities jumped to a record high of N40.92 trillion at the end of December.

Eight companies had a market value of at least N1 trillion at the end of last year, up from five in 2022. Seplat Energy, Zenith Bank and Guaranty Trust Holding Company joined Airtel Africa, Dangote Cement, MTN Nigeria Communications, BUA Cement and BUA Foods in the trillion-naira valuation club. The mega caps account for about 70 percent of the total market value of companies on the NGX, with Airtel leading the pack.

The NGX All-Share Index crossed the 70,000bps mark for the first time ever in November and ended the year at 74,773.77bps.

“Despite historical trends during previous election years that showed subdued market performances (2015: -16.1 percent; 2019: -14.6 percent), the local bourse has displayed an upward trajectory, defying concerns about the impact of elections,” analysts at Lagos-based Cordros Securities Limited said in their markets review and outlook report.

They said the market performance was majorly influenced by investors’ positive reaction to the announcement of critical policy changes by the new administration, specifically the removal of implicit energy subsidies and unification of all official exchange rate windows.

“We expect Nigerian equities to exhibit resilience in 2024, though at a modest pace,” the analysts said. “Our projection is that we do not expect any of our identified determining factors – an improvement in the FX space, prospects of improved macroeconomic conditions, and monetary policy direction and impact on fixed income yields – to have an outsized impact on eventual market performance.”

Highlighting the risk of a disconnect between improvement in company fundamentals and valuation multiples and intermittent profit-taking by investors, they forecast a 11.6 percent positive return for 2024.

They expect bullish sentiment at the start of this year as investors gear up for 2023 full-year financial results and dividend reinvestment.

Analysts at Afrinvest Research pointed out that the country’s equities market raced to a 15-year high in 2023 “fuelled by market-friendly reforms by the current administration and resilient corporate performance”.

“We expect the equities market to sustain the positive momentum through 2024, though at a modest pace. Our model forecasts a 14.8 percent return for the year (base case), premised on improved macroeconomic conditions, anticipated growth in foreign portfolio investments, and a more stable FX environment,” they said in a new report.

Further rate hike expected to dampen investor appetite

Bismarck Rewane, managing director of Financial Derivatives Company Limited, said in a presentation last month that the stock market will adjust to the direction of the monetary policy rate (MPR) in January 2024.

The MPR, also known as the benchmark interest rate, was raised by the Central Bank of Nigeria (CBN) four times last year to 18.75 percent from 16.5 percent at the end of 2022 in a bid to fight inflation, which quickened to a new 18-year high of 28.20 percent in November.

“The Nigerian equities market will experience a market correction in 2024. A further hike in interest rate will dampen investor appetite for equities. New stock listing will bolster market capitalisation and attractiveness,” he said.

He said the proposed listing of Dangote refinery would strengthen investors’ sentiment.

“Earnings will remain a function of exchange rate losses or gains. Moderation in inflation is expected to reduce the strain on corporate margins in 2024,” Rewane added.

Foreign inflows drop amid lingering FX crisis

Foreign portfolio investment inflows into the stock market fell to N157.32 billion as of November from N187.12 billion a year earlier, while outflows rose to N205.43 billion from N176.90 billion, the latest data from the NGX show.

FX shortage is largely to blame.

Africa’s biggest economy has been grappling with a dollar shortage since 2016 when it slipped into its first recession in over two decades induced by the oil price collapse that started in mid-2014 and the sharp decline in its production of the commodity.

“We believe the prospect of foreign portfolio investors (FPIs) returning to the market is a key factor to monitor in 2024. As highlighted earlier, foreign investors’ interest in the Nigerian equities market has remained weak due to difficulty in accessing and repatriating funds,” Cordros Securities analysts said.

They said while steps taken by the CBN to clear FX backlog showcased its dedication to resolve the liquidity constraints, the expected return of FPIs will likely be gradual as “re-entry hinges on resolving FX illiquidity challenges”.

“Overall, we expect a modest improvement in FX liquidity conditions, although still weak compared to historical levels, as we believe the CBN has regained momentum in implementing FX reforms,” they added.

The reclassification of Nigerian indexes from Frontier Markets to Standalone Markets by MSCI could delay the return of FPIs, even if FX liquidity concerns improve in the short term, according to them.

“A substantial number of investors who currently hold naira-denominated assets did so based on Nigeria’s former classification as a Frontier Market,” the analysts said.

Afrinvest Research said improved clarity and transparency in the FX market is expected to encourage greater FPI participation.