The stock market on Thursday gained the most since late May as institutional domestic investors who are facing limited investment options returned, pushing the banking index to highest daily gain since January 2016.
The banking index rose 7.04 percent, while the main equity gauge advanced 1.91 percent as attractively priced banking stocks returned much-needed liquidity to one of the worst performing stock markets globally.
Guinness gained 9.7 percent to N26 per share to lead the advancers by naira gain. GTBank rose 6.79 percent to N29.9 per share, Zenith Bank surged 7.58 percent, while Dangote Sugar and Access Bank inched up by 9.55 and 9.64 percent, respectively.
“The banking stocks are the most attractive right now because they are very liquid, fundamentally sound and many are grossly under-priced,” said Aderonke Akinsola, banking analyst at Lagos-based ChapelHill Denham.
Akinsola noted that banks amid the weak macro environment are relatively positioned to withstand headwinds, and the minimum-loan directive which discouraged banks piling into high-yield government securities has caused them to innovatively create quality lending opportunities.
The market-frenzy follows a move by the CBN to limit participation in high-yielding OMO market which sent real returns on T-bills below zero, forcing big domestic investors back to equities.
The move to restrict the OMO market to banks and foreign investors have left big domestic investors, mostly pension funds and insurance companies, with idle funds and caused heavy demand at a primary market NTBills auction on Wednesday.
The OMO bills accounted for N13trn of total liquidity in the money market, while treasury bills accounted for N2trn.
Consequently, the interest rates on Nigerian Treasury bills collapsed to within single digits for the first time since 2016, fuelling a hunt for lucrative opportunities outside the fixed income space.
“In terms of sustainability, you can’t say this is fundamentally driven because the economy is yet to improve,” said Wale Okunrinboye, head of research at Lagos-based Sigma Pensions Ltd.
The OMO market is expected to witness six more maturities amounting to N3.32 trillion before the year runs out, according to ChapelHill Denham.
This implies that the holdings of domestic corporates and individuals in the market estimated at about 25 percent of outstanding OMO bills equal to about N829.25 billion would have to seek for investment opportunities in bonds, treasury bills and equities in the next six weeks.
The Debt Management Office (DMO) will auction two more FGN Bonds before the end of the year, according to the FGN bonds issuance calendar for the fourth quarter of 2019.
The Federal Government plans to raise N300 billion from the bonds, indicating foreign portfolio investors and banks which account for a larger share of the market would leave less than N150 billion for the local non-banks and individuals.
Consequently, it is estimated that N680 billion worth of liquidity would be left for investment placement in either treasury bills, equities or other assets.
However, the CBN indicated that it would still conduct an NTBills auction this month to roll over about N150.6 billion worth of maturing papers on November 28.
While demand for the issuance may become weak given the lower rate environment on TBills with negative real interest rates, BusinessDay estimates that if local non-banks and individuals account for half of the successful bids at the auction, at least N605 billion will be hunting for investable instruments aside OMO, NTBills and Bonds.
This creates an opportunity for equities to remain bullish in the short term.
The rally, however, would depend on how long CBN maintains this policy and how long it takes for valuation to correct, said Okunrinboye.
“End of Q1, most companies would start paying dividend and investors may move on to other asset classes,” he said.
On Thursday, the banking sector significantly outperformed all sectors, closing 7.4 percent higher as all the five sectorial indices – consumer goods, industrial goods, oil & gas, banking and insurance – tracked by BusinessDay closed in the green.
Oluwasegun Olakoyenikan & Segun Adams
