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Investors have made N7.5tn this year from Nigerian equities

Investors have made N7.5tn this year from Nigerian equities

Investors have made a killing this year from investing in Nigerian equities after the market rallied to levels not seen in the last seven years.

The market capitalization of the Lagos Bourse stood at N20.45 trillion on Tuesday, 29th December, up from the N12.97 trillion market cap it opened the year with, putting about N7.5 trillion in the pocket of investors.

That’s the highest profit ever booked by investors since 2015, according to data compiled from the Bloomberg terminal, helped by the low yield seen in the fixed income space and the cheap valuations of most Nigerian blue-chip companies caused by the impact of the pandemic.

The market has gained the interest of investors after the Central Bank restricted non-bank domestic investors from buying short-term OMO bills. The move, which was worsened by limited investible options, made local institutional investors push more liquidity into bonds and treasury bills, crashing the yields of fixed income instruments to near zero.

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When adjusted for inflation, which quicked to 14.89 percent in November, investors in bonds and treasury bills have been forced to make do with negative real returns. And even though domestic investors like the Pension Fund administrators have largely manoeuvred their way, rewarding real returns higher than inflation by investing in long-dated bonds and taking advantage of the price rally, they are still faced with “reinvestment risk” when they make a new purchase.

The low-income environment in the fixed income space alongside the strong fundamentals of most bluechip companies heightened investors interest in stocks.

Although largely dominated by foreign investors, the Nigerian stock market has returned 45.7 percent this year, racing to close the year as the best performing stock market among the 80 exchanges globally.

That’s higher than the 37.7 percent returns that investors have gotten from investing in bonds on the exchange, but lower than 264.9 percent returns from Exchanged Traded Funds.

Stocks such as Dangote Cement, Airtel Africa, AIICO Insurance, FCMB, Dangote Sugar, Africa Prudential, Fidson Health Care, Fidelity Bank, Flour Mills, Zenith Bank, Vita Foam among others have rewarded investors with good returns this year.

Outlook for Nigerian equities

With no respite in yields on the fixed income space, the Nigerian equities market should continue its bullish trend in the new year 2021.

Godwin Emefiele, governor of the Central Bank of Nigeria in November, said he will continue with its monetary policy measures aimed at boosting the stock market, even as the country faces higher inflation and remains in recession.

Emefiele, who made this known at the end of the monetary policy committee meeting, the last for the year, said he believes a bullish stock market is a leading indicator of a medium-term macroeconomic recovery of the economy.

Accord ing to Emefiele,“the Committee considered the improved performance in the equities market as a leading indicator of medium- term macroeconomic recovery. Thus, it urged the Bank to maintain its policies on the exchange rate and financial system stability to attract more investment into the Nigerian equities market.”

While we expect the bullish trend seen in the Nigerian stock market to continue next year, what is not sure is whether foreign portfolio investors will renew their interest in investing in Nigerian equities.

With Africa’s largest economy still confronted with huge foreign exchange crisis, it appears doubtful of foreign portfolio investors to bring in new capital when they are finding it difficult to repatriate their already invested funds.