Nigeria’s equities market performance has continued to be largely reflective of investor apathy towards equities. A major factor behind the apathy towards equities is largely the effect of Nigeria’s monetary tightening by the central bank which has resulted in elevated yields on fixed-income securities.
Following the hammering the market took in October, the Nigerian bourse’s year-to-date (ytd) return plunged to a low of +3.64percent (as at Monday, November 7) from a peak of almost +27percent in May.
The market has been a victim of profit-taking and sell-off by investors who are rebalancing their portfolios in favour of higher yields in the fixed-income market.
In his presentation at Lagos Business School (LBS) November breakfast session, Bismarck J. Rewane, MD/CEO, Financial Derivatives Company Limited asked investors to diversify their portfolio across stock, bond, real estate, gold, exchange-traded funds (ETFs) and Fixed Index Annuities.
According to him, investors who want to go for a guarantee should consider treasury security and time deposit; while those who want to hedge should go short on stocks that are underperforming.
Among other factors, he identified to have the stock market is soaring inflation (Inflation to remain elevated in Q4 2022 and 2023. Financial Derivatives Company is projecting 21.32percent in October); heightened uncertainties (miscommunication about debt restructuring, redesigning of the naira, and forex and exchange rate policies); and price correction (is Airtel overpriced?).
He noted that bond yields have been rising in the same direction as interest rates, noting further that stock market return is inversely related to interest rate hikes.
“There is an inverse relationship between bonds, equities and interest rates. Rising inflation technically increases bond yields and reduces bond prices. When the cost of borrowing money rises, bond prices usually fall. High-interest rates are favourable for bondholders but discouraging to bond issuers. Equity investors will sell off stocks for higher bond yields.
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“Most stocks recorded underwhelming performance in October 2022.
“There was aggressive sell-off of liquid stocks for higher-yielding securities. Airtel, the most capitalised stock had the highest loss. All sectors are on a losing streak except oil & gas. Bargain hunting and cherry picking are having positive impacts on stocks in the oil & gas sector. Banking sector shedding over 6 percent year-to-date (YtD), as 9 banks battle Moody’s downgrade,” Financial Derivatives CEO noted.
“Increased deficit financing is making sovereign debts more attractive than equities stocks. Nigeria now downgraded by Moody’s by one notch due to: rising debts, likelihood of sovereign default. The nation’s Total Debt Stock is N42trillion ($103.3billion), rose by 370percent in the past 10 years, representing 23.4percent of GDP. Also, external debt rose by 1,483percent to $40billion (N16.6trillion).
“Revenue realisation is only a 42percent of projected half-year revenue. Debt service amounts to 114percent of revenue; 66percent of recurrent expenditure funded through borrowing. Funding government deficit through the printing of money – Ways & Means Advances (WMA) rose 3,500percent to N22trillion in 10 years.
“Debt monetisation causing inflation through its impact on high-powered money. N20billion of WMA to be securitised, converted to a 40-year bond at 9 percent, could change the yield curve as longer-term yields become lower than short-term yields.
“Over 94 central banks have raised rates this year to fight rooftop inflation. Over 50 central banks have raised interest rates by over 100 basis points (bps). US raised interest rates again by 75bps – sixth consecutive increase. There would be a flight to stronger economies – US, etc… and a shift to new fixed income,” the analyst further said.
The equities market has seen muted performance due to elevated yields in the fixed-income market and investors’ waning appetite for risk as the 2023 presidential election approaches.
“Average bond yields have expanded by up to 250bps YtD, and around 380bps since the end of Q1’22. We expect the yield environment to remain elevated due to the tight liquidity conditions in the market,” said Tunde Abidoye, Head of the Equity Research team of FBNQuest during his presentation at the company’s Media Roundtable in Lagos recently.
He noted: “September’s headline inflation rate increased to 20.77percent, making the eighth consecutive month of rising inflation. The rate of increase slowed to 25bps compared with 88bps in August. Upward pressure on food prices remains the major driver. However, the momentum of food inflation slowed in September; it increased by 22bps to 23.3percent from 110bps in August. The core (non-food) measure in 40bps to 17.6percent, slowing from a 94bps surge to 17.2percent in August.
“In a bid to curb inflationary pressure, the Monetary Policy Committee (MPC) at their September meeting voted to raise the policy rate by 150bps to 15.5percent and the cash reserve ratio (CRR) by 500bps. We see the headline rate at circa 22.5percent year-on-year (y/y) by the end of 2022, before slowing to circa 18.6percent by end-2023.
“The committee’s justification for the aggressive rate hike was the need to curb rising inflation which is now at a 17-year high of 20.5percent, and to close the gap between the policy rate and inflation. Average bond yields have expanded by up to 250bps YtD, and around 380bps since the end of first-quarter (Q1) 2022. We expect the yield environment to remain elevated due to the tight liquidity conditions in the market. We see the MPR unchanged at 15.5percent by the end of 2022. However, this is largely dependent on the trajectory of inflation,” Abidoye stated.
In their October equity performance review, Vetiva research analysts noted that the All-Share Index extended its month-on-month (m/m) losses to a fifth consecutive month, falling 10.58percent m/m, “as inflationary pressures dragged investor confidence in the equity market”.
“Losses were broad-based, with all sectors, ex-Industrial Goods, closing lower m/m. Sentiment across our conviction stocks was negative also, as the stocks shed 3.04percent m/m. Our Consumer Goods picks were amongst the worst performers, as our picks contributed a 1.01percent loss, on the back of investors’ concerns over the impact of inflation on consumer consumption, coupled with weak third-quarter (Q3) 2022 financials,” Vetiva research analysts said.
Amid trading sessions of negative and positive closes, Nigeria’s equities market rose by 0.81percent or N194billion in the trading week ended Friday, November 4.
Industrial stocks helped the market to close the review week in green despite sell-off in banking, insurance, consumer good and oil & gas stocks.
In their opinion, Meristem research analysts said in a recent note that “the mood in the equities market remains largely bearish, given the low level of activities (market breadth declined to 0.47x vs. 1.00x the previous week). The gains recorded last week were mainly driven by buying interests on bellwether stocks.”
“We expect investors to continue to favour the fixed-income market given the attractive level of yields. Also, the expectation of an increase in stop rates at the Treasury Bills auction scheduled to hold this week, further adds credence to our assertion.
“Thus, barring any bargain hunting activity on heavy-weight tickers, we expect the market to close in the negative region this week,” Meristem research analysts added.
Their counterparts at United Capital research in their November 7 investment view for this week retained a near-term expectation of persistent sell pressure in the Nigerian equities market. They however recommend that “the market is only good for investors with patient capital. We advise speculators to trade with caution.”
