From being the world’s best performer in 2020, Nigerian equities had a terrible outing in February, after a sooner than expected upward reversal in yields is making investors rebalance their portfolios more into fixed income instruments.
The market suffered its longest bearish run in one year, in February, and all of the 10 analysts polled in a BusinessDay survey see no respite for stocks in the new month.
As long as yields keep going up, the equities market will continue to take a hit, according to Gloria Fadipe, head of research at CSL Stockbrokers. “However, we expect dividend payouts and good corporate earnings to support some stocks if the yields are good,” Fadipe said.
Of the 20 trading days in February, the market lost on 16 days, gaining only on four days, as investors overlooked impressive full-year numbers of listed companies, as well as the positive news of Nigeria’s exit from its worst recession since the 80s, in the fourth quarter of 2020.
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The All-Share Index, which serves as a gauge of overall market activities, closed the month, falling below 40,000 points, bringing year-to-date returns to -1.17 percent. As such, investors lost N1.24 trillion of their wealth, causing the market capitalisation of listed stocks to close the month lower at N20.82 trillion from N22.059 trillion recorded at the end of trading in January.
Although the drivers for equities in the coming months are still well positive driven by the continued recovery of the economy, rising oil prices, and better than expected corporate earning performance, according to Abiodun Keripe, managing director, research and consulting, Afrivest. “However, the downside risk is the recovery in yields which are fast climbing higher,” he said
“This may mean that investors will further take out their money from equities and look more into fixed income space,” Keripe told BusinessDay.
“The equities market will likely exhibit a zig zag pattern due to the opposing forces of yield elevation in the fixed income market and dividend announcements by corporates, said Gbolanhan Ologunro, an economist and researcher at Cordros Capital Limited. “However, the pendulum is likely to swing to the bears given that investors will become increasingly reluctant to leave gains in their portfolio due to expectations for a wide market correction after the earnings season,” Ologunro said in a response to BusinessDay
Last year, Nigerian equities benefitted from the low-interest-rate environment particularly in fixed income instruments that made investors in search of higher returns, rotate their portfolios into stocks.
The initial trigger was a CBN directive restricting non-bank local investors from investing in OMO bills; a move that resulted in excess liquidity in fixed income space. Yields on long-term debt instruments traded at one of their lowest on records, last year, while interest on T Bills was almost zero.
Nigerian equities returned 50.03 percent last year with both domestic institutional investors as well as retail investors, increasing exposure into the market, and covering up the outflux of portfolio investors who exited the market due to Nigeria’s poor management of dollar liquidity.
But it’s barely two months away into the new year, and the free fall in interest rates are reversing upwards, hurting equities.
Interest on one-year treasury bills climbed 100 basis points to 5 percent at the last auction, February 24, as investors pointed at rising inflation to bid rates higher. Similarly, yields on benchmark Federal Government of Nigeria (FGN) bonds rose to the highest levels in eight months, hitting double digits.
The performance of the market will remain mixed, meaning it will be neither here nor there, according to Wale Olusi, head of research, United Capital.
“In the first week of the market, we expect earnings and dividend announcements should lift the market. However the reversal in yields is expected to continue, and when that happens, there will be renewed bearish sentiments for equities,” he said.
“The market is gradually correcting, and even those stocks that are expected to weather the storm, may shed points,” Olusi said.
