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Will economy outperform consensus on Emefielenomics, reform green shoots?

Nigerian stocks are on fire barely 10 days into the New Year.

With money is flowing into the Nigerian stock exchange (NSE) at record rates in 2020, it is the best performing stock market globally so far, having gained 9 percent this year.

Some top performers so far include Cornerstone Insurance PLC: +29%, FBN Holdings: +24%, and Dangote Cement: +21%.

Data from the NSE shows that as at November 2019 domestic institutional investors were responsibly for nearly 50 percent of trades on the bourse.

Anecdotal evidence suggests that the number has gone up as local Pension Funds respond to being shut out from the Central Bank of Nigeria (CBNs) Open Market Operation (OMO) bills, by buying stocks.

Total Pension Fund assets of N9.8 trillion as at October 2019, comprised of Federal Government securities at 70.43%, money market funds 11.73%, corporate debt 6.5% and domestic ordinary shares at 4.85%.

This was definitely an anomaly as everywhere in the world a larger percentage of Pension assets are invested in equities, which outperforms other asset classes over a long period of time.

The CBN Governor Godwin Emefiele, should probably take the credit for the rally being witnessed in the equity markets.

After banning Pension funds from the OMO markets they pushed most of their liquidity into the Treasury Bills market which subsequently led to a collapse in yields.

The CBN in a NTB auction held last week, sold 91-day debt at 3.5%, while the rate on 182-day bills was 4.9%.

These rates are both below inflation (which printed at 11.2% in October), but more significantly also below the dividend yields of a lot of blue chip companies trading on the NSE.

So in a sense it was a no-brainer that PFAs would rotate into equities from bonds, but the main catalyst for that was the CBNs regulatory actions.

Another regulatory action that could underpin growth this year is the December 2019 minor review of MYTO 2015 (multi-year tariff order) published by the regulator NERC last week which showed the average end user allowed electricity tariffs will be slightly increased from N25.3/kwh to N31.05/kwh from April 1st, 2020.

The Nigerian power sector has largely remained dysfunctional due to the inability of the regulator to enforce cost reflective tariffs for power.

This had led to Distribution Companies (DisCos), who are closest to the consumers mostly insolvent as they often routinely recouped less than 40% of their billings for power supplied.

This also meant that they could not really make investments to upgrade their transformers and substations to reduce technical power losses or introduce innovation to reduce leakages or financial losses.

It is hoped that the gradual move to cost reflective tariffs would help to staunch the bleeding of the DisCos and strengthen the power chain from DisCos to Transmission Company of Nigeria (TCN), GenCos and gas suppliers.

Staying with power, the recent reversals of some sacking of people known as reformers in the sector would be positive for investor sentiment going forward.

President Muhammadu Buhari on Thursday reversed the dismissal by the Power Minister of the Managing Director of the Nigeria Bulk Electricity Trading Company Limited NBET, Marylin Amobi.

NBET which was incorporated on July 29, 2010 had served as a special purpose vehicle for the purchase of electricity from the Generation Companies (GenCos), which it sells directly to the Distribution Companies (DisCos) through vesting contracts, under the Power Purchase Agreements (PPAs).

The reinstatement of the NBET MD was the second of such act by the President who had on Tuesday, also reversed the minister’s suspension of Damilola Ogunbiyi as the managing director of the Rural Electrification Agency (REA).

Ogunbiyi was widely regarded as a reformer in the REA and her suspension largely condemned by all.

Meanwhile MTN Nigeria, a subsidiary of MTN Group, Africa’s leading telecommunications company announced on Friday that the Attorney General of the Federation (AGF) and the Ministry of Justice has formally withdrawn the demand for the Telco to pay N242.24billion and $1.3 billion alleged back taxes.

According to a statement by the mobile-phone company, its legal counsel received a letter dated 8 January 2020 from AGF declaring the withdrawal of the claims.

The issues will now be transferred to the Federal Inland Revenue (FIRS) and Nigerian Custom Service (NCS).

MTN Nigeria which had filed a suit against the Attorney General of the Federation, over the outrageous claims said it will consequently follow due court process to withdraw its legal action against the AGF and engage with the FIRS and NCS on the issues.

This is a major confidence builder in the investment climate of the country and MTNN stock as well.

Its shares were up 6.4 percent last week and may well continue to rally as investor’s digest the good news.

On a one by one basis the recent actions may seem small and inconsequential to improving the negative narrative prevalent in the Nigerian economy.

However taken together there is a sense that the country may gradually be reaching a point where investor sentiment shifts dramatically to a positive stance, leading to a return of animal spirits and attendant upside for the economy.

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