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From zero to hero: Kenya shows Nigeria how reforms can spur stocks

The stocks of Kenya’s 20 biggest companies went from $6 million worth of trades since the beginning of the year to $13 million in three weeks. That’s the power of reforms.

The rally came was after the removal of a controversial cap on interest rates first introduced in 2016 by the government to force bank lending.

With the cap removed after creating more problems than solutions for the Kenyan economy, investors have cheered the move in classic style as has reflected in their renewed appetite for once discarded stocks.

“Investors have made a classic response to a market-friendly reform,” said Gregory Kronsten, head of fixed income research at FBN Quest.

The Nairobi Stock Exchange had been in double-digit negative territory since the beginning of the year, along with the Nigerian Stock Exchange in Lagos, since the end of July.

“The turning point for investors has been the removal of the legal cap on interest rates, which should give the private sector additional access to capital and provide a boost for growth,” Kronsten said. The Kenyan economy has been growing by more than 5 percent annually but investors did not respond until the reform was announced.

In comparison, Nigeria has not achieved 5 percent GDP growth since 2014 and has continued to foot-drag on critical reforms needed to give the economy a much needed lift.

The lack of reforms is taking a heavy toll on the stock exchange which closed at a year to date loss of 16.28 percent Friday, November 8.

The two largest new listings on the NSE since Dangote Cement (MTN Nigeria and Airtel) have failed to lift the market despite an initial boost from the former that proved unsustainable.

Momentum under President Muhammadu Buhari’s second term has been tepid.

Key reforms in the downstream petroleum sector, electricity market and foreign exchange market have stalled.

The stock market has aptly reflected the downturn in investors’ sentiments but that has not struck a chord among politicians in the capital of Abuja.

Stock market turnover through to end-September was 27 percent down on 2018, which on its own was a poor year.

The split between domestic and foreign participants was again roughly 50/50, unchanged from the previous year.

The downturn is despite cheap valuations of Nigerian stocks which are trading at a discount to market peers including Kenyan stocks.

MSCI Nigeria index is trading at a price to earnings ratio of 4.8 times with a 12-month target, an all-time low.

“It’s hard to see any positives on the horizon with a government that is largely statist and has disdain for private capital,” a senior banking source said.

The government’s latest moves from the impossible-to-enforce closure of land borders to all trade and the CBN’s increase in minimum LDRs to 65 percent (effective end-2019) have not helped investor sentiments.

The latter policy may support earnings growth for stronger banks, “but it is hard to reconcile policies that force private sector lending with those that severely restrict trade,” EFG Hermes said in a note to clients in October.

“These factors keep us Underweight on Nigeria relative to Frontier and Emerging Market peers.”

Foreigners have been net sellers of Nigerian stocks for much of the year, totalling USD106 million year to date.

To make matters worse, local pension funds have kept cutting their exposure to equities after a regulation change in early 2019 that eliminated minimum allocations to variable return assets.

What is clear is that the lack of optimism about the economy has soiled appetite for Nigerian stocks, a barometer of the health of the economy, home and abroad.

Big companies with sound fundamentals from Guaranty Trust bank to Dangote Cement are trading at near 52-week lows, as the lack of market-stimulating reforms take a toll on valuations.

If the Nigerian government ever questioned the impact that reforms could have on a downtrodden stock market, Kenya has stepped up with an example.

“Potential reforms to lift the Nigerian market, Kenya-style, would include: the passage of a petroleum industry bill in some form; fuel price deregulation; a review of exchange-rate policy; and power sector reform, not just confined to cost-reflective tariffs,” Kronsten of FBN Quest said.


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