The Nigerian stock market has extended its rally this year, defying election-related risks as local investors continue to dominate deals.
The market finished stronger last year with a return of almost 20 percent, despite a bumper hike in the benchmark interest rate and pre-election tensions.
Major political events such as a national election usually have an impact on the stock market.
Despite expectations of investors’ risk aversion due to election-related risks, the Nigerian equities market gained N1.40 trillion in February, the month a hotly contested presidential poll was conducted.
“General elections typically bring about uncertainty and markets do not like uncertainty,” analysts at Coronation Research said.
As of February, the Nigerian Exchange Limited (NGX) recorded a return of 8.3 percent, compared with 7.2 percent and -2.6percent for Johannesburg Stock Exchange (South Africa) and Nairobi Stock Exchange (Kenya) respectively.
Despite post-election uncertainties, Nigeria’s equity investors increased holdings of fundamentally sound stocks with improved valuation and dividend yield amid a depressed interest-rate environment
Experts’ views on key drivers of stock rally
“The market has been indifferent to the election season largely due to the fact that foreign investors no longer dominate the market,” Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said.
He said election periods in the past were characterised by the exit of foreign investors due to uncertainty, which often led to sell-offs and a weakening of investors’ sentiments.
“Since 2020, domestic investors now dominate transactions and so the market is no longer too sensitive to political season. It’s performance both before and after the election is influenced by corporate earnings. So, I think the earnings season is largely responsible,” he said.
Ayodele Akinwunmi, relationship manager at FSDH Merchant Bank Limited, said, “Investors are positioning in good stocks with strong earnings power in anticipation of the acceleration in the economy that would be associated with the incoming administration’s growth-oriented economic policies.”
The Tunde Abidoye-led team of research analysts at Lagos-based FBNQuest Capital said the NGX’s positive performance in the first two months of 2023 defied their expectation of a subdued performance in the first quarter of the year.
They said in a note: “We had expected a more modest performance due to our expectation of investor risk aversion brought on by election-related risks. The primary driver behind the solid performance of the NGX in February was gains made by bellwether stocks during the month, mostly due to positive surprises in their fourth quarter (Q4 2022) results.
“Looking ahead, we expect an even better performance by the NGX post the general elections, particularly after the transfer of power to the new administration. We anticipate a return of circa 15 percent for the domestic equity market in 2023.”
Top-performing stocks year-to-date
Many stocks have impressed investors this year, helping to push the market’s year-to-date (YtD) return to 8.92 percent as at March 9.
Looking at the performance of the market as at that date, MRS rose by 98.2 percent, while Conoil was up 59.2 percent. Other top-performing stocks were Northern Nigeria Flourmills (78.9 percent), C& I Leasing (24.4 percent), Nahco (31.3 percent), Redstar (22.6 percent), Ikeja Hotels (20 percent), and Caverton Offshore Support Group (15.2 percent).
Others are Flour Mills (16 percent), Dangote Sugar (19.3 percent), Berger Paints (16.7 percent), Chemical & Allied Products (13.5 percent), Dangote Cement (10.3 percent), and Lafarge Africa (10.2 percent). As at March 9, MTNN share price rose by 15.5 percent; Neimeth, 10.5 percent; Julius Berger, 10 percent; Lasaco, 17.2 percent; Transcorp, 22.1 percent; Okomu Oil, 11.2 percent; TotalEnergies, 13.4 percent; and Oando, 14.3 percent.
In the banking sector, Ecobank Transnational Incorporated rose by 13.2 percent; FCMB, 11.9 percent; Fidelity Bank, 9.5 percent; GTCO, 9.5 percent; Stanbic IBTC Holdings, 19.6 percent; UBA, 10.5 percent; and Wema Bank, 10.3 percent.
Government has role to play in sustaining market growth
“The incoming administration should pay close attention to the capital market in order to maximise its array of opportunities. Both the capital and money market should receive balanced attention from the federal government and promote unified exchange rate of the naira to encourage participation of foreign investors in the market,” said Oluwole Adeosun, president/chairman of Council of Chartered Institute of Stockbrokers.
According to him, the fundamentals of the market are getting stronger day by day as a result of so many reasons.
He said: “The elections actually excite the market, because of the imminent positive changes we expect. We expect the new president and his government to hit the grounds running before the inauguration by immediately opening engagement with the capital market community, as that will help in crafting an effective plan of action for the administration.
“We expect a stable and unified exchange rate, which will increase the level of foreign investors’ participation in our market. We also expect policy and positive pronouncements that will boost the confidence of stakeholders.”
Market in 2023 differs from that of 2015
Coronation Research analysts, in a recent note, highlighted that the equity market in 2023 differs from that of 2015.
According to them, a change in the composition of market participants in the Nigerian equity market is a significant factor in the market’s bullish trend.
They said: “The increased percentage participation by domestic investors in the local stock market is due to several factors: firstly, the limited investment opportunities in Nigeria’s money and capital markets; secondly, the expanded system liquidity, making risk-free assets such as treasury bills less attractive; and thirdly, bargain-hunting investors holding positions to qualify for the upcoming FY 2022 dividend season.
“Although the reduction in foreign investor participation has short-term benefits in shielding Nigerian markets from global economic downturns that drive capital flight across global markets, the long-term consequences are far-reaching. We do not expect a recovery in foreign participation in our markets until a solution to the issues of multiple exchange rates and FX shortages is found.”
Read also: How forex impacts trade in Nigeria
Ten stockbrokers account for 63.13% of trade in two months
Between January 1 and February 28, only 10 stockbrokers traded about 13.735 billion shares or 63.13 percent of total equities traded on the NGX.
These stockbrokers and the volume of shares they traded include Apel Asset Limited (6.845 billion units or 31.46 percent), Cardinalstone Securities Limited (2.003 billion or 9.21 percent), APT Securities and Funds (1.138 billion or 5.23 percent), Morgan Capital Securities Limited (841.215 million or 3.87 percent), Meristem Stockbrokers Limited (712.398 million or 3.27 percent), and Stanbic IBTC Stockbrokers Limited (660.171 million or 3.03 percent). Others are Associated Asset Managers Limited (425.320 million or 1.95 percent), FBN Quest Securities Limited (378.836 million or 1.74 percent), EFG Hermes Nigeria Limited (377.108 million or 1.73 percent), and Cordros Securities Limited (353.129 million or 1.62percent).
Domestic investors outshine foreigners
Total transactions at the NGX rose by 38.66 percent from N140.70 billion in December 2022 to N195.10 billion in January 2023. Of this total, domestic transactions amounted to N170.20 billion (87.24 percent), while foreign transactions stood at 12.76 percent.
Inflows of foreign investor funds increased from N8.64 billion in December to N9.84 billion in January 2023, while outflows slightly increased to N35.66 billion from N35.28billion in the same period. However, on a year-on-year basis, foreign transactions at the bourse moderated by 39.66 percent from N41.31 billion to N24.90 billion. Domestic transactions also slowed from N282.07 billion to N170.20 billion.
A further analysis of the total transactions revealed that total domestic transactions increased by 35.63 percent from N125.49 billion in December to N170.20 billion in January 2023.
According to the NGX, institutional investors outperformed retail investors by 58 percent. Retail transactions increased by 1.08 percent from N35.28 billion in December to N35.66 billion in January 2023.
However, the institutional composition of the domestic market increased by 49.14 percent from N90.21 billion in December 2022 to N134.54 billion in January 2023.
Analysts have said that the reduced year-on-year transactions on the bourse could be attributed to cautious trading in the face of election season.
