• Friday, March 29, 2024
businessday logo

BusinessDay

Local investors flock to stocks at fastest pace since 2008 crash

Local investors flock to stocks at fastest pace since 2008 crash

You would have to go back to 2008 for when Nigerians were more active in the stock market than they were last year.

That is after domestic transactions on the Nigerian Stock Exchange (NSE) totalled N1.4 trillion in 2020, according to data published Monday by the NSE, the highest since 2008, when domestic transactions came to N3.4 trillion.

The year 2008 also coincided with a painful stock market crash that saw the value of stocks initially rallying to an all-time high of N13.5 trillion in March before halving to N6.54 trillion by the end of the year, as unrealistic stock valuations unravelled.

With N6.96 trillion wiped off investors’ wealth after the crash, local investors steered clear of stocks.

In 2009, domestic transactions collapsed to N947 billion, less than a third of the transactions that happened in 2008.

The renewed appetite for stocks is being driven by the low-interest rate environment, which has pushed investors in search of higher returns to the stock market.

The interest rates on bonds and treasury bills were unable to match average inflation of 14 percent in 2020, which meant investors were faced with negative real return on investment.

That increased the allure of Nigerian stocks that had been undervalued for two years compared to their frontier and emerging market peers.

Read Also: PIB: Host communities want NDDC scrapped, replaced with HCDC

Who are buying and why?

The buying interest in 2020 was particularly fuelled by the Pension Fund Managers who sit on a fat pile of cash owned by Nigerian workers.

According to NSE data, domestic institutional investors, which include the Pension Fund Managers, staked N820 billion in the stock market in 2020, 61 percent more than they did in 2019. Retail investors also invested more in the stock market than they did last year at N618 billion, 30 percent higher than the N477 billion in 2019.

Foreign transactions however fell to a four-year low of N729 billion as dollar shortages curbed foreign appetite for stocks last year.

The trend of local investors, led by the Pension Fund Managers, piling into the stock market is likely to continue this year as investors seek higher returns in a low yield environment, according to Omotola Abimbola, an analyst at leading investment bank, Chapel Hill Denham.

“There will still be a lot of interest going the way of the stock market this year as we expect the low interest rate environment to linger,” Abimbola states.

“There are undervalued stocks in the market as well as high dividend-paying stocks that should do well this year, just that they may not do as well as last year,” Abimbola adds.

Nigerian stocks were on steroids after jumping 50 percent last year, the highest in at least a decade. That performance meant the Nigerian stock market ranked as the best globally in a year where markets were ravaged by the COVID-19 pandemic.

PFAs pick up from where they left off

The Pension Fund Managers have picked up where they left off in 2020, after failing to turn up as expected for the first bond auction of 2021.

The negative real yields on fixed income remain the chief reason for the apathy.

At the first bond auction of the year, the Debt Management Office (DMO), offered N150 billion but raised N122 billion, even though it attracted a total bid of N238 billion.

“The PFAs were less prominent in the total bid this month, being reluctant to commit their funds when the trend in yields is again rising,” analysts at FBN Quest note.

The interest rate on the benchmark Federal Government bond closed at 8.34 percent Tuesday, much less than the most recent inflation rate (December) of 15.75 percent.

While investors continue to snub bonds, the stock market is already up 3.26 percent this year, a sign of the continued appetite for stocks. That compares with a 6.29 percent return in Egypt, 3.51 percent return in Kenya and 4.38 percent in Ghana. South African stocks lead the pile of top African economies with the best year-to-date stock returns with 7.61 percent.

The central bank’s monetary policy committee voted to hold interest rates at the end of its two-day meeting on Tuesday, citing the more pressing concern of inflation.