Local investors still king in Nigeria’s equities market

… bearish momentum to increase on rate hike

Local investors in Nigeria’s equities market continued to take the shine off their foreign counterparts, accounting for equities transactions worth N1.729 trillion in ten (10) months to October. This value of trade by the locals (institutional and retail) represents 83.19 percent of the total value of equities exchanged on the Bourse. Deals by domestic retail investors were valued at N580.83 billion in the review period while that of domestic institutional investors worth N1.148 trillion.

The total value of stocks traded on the Nigerian Exchange Limited (NGX) in ten (10) months to October was N2.079 trillion, a remarkable increase from N1.544 trillion recorded same period in 2021.

In ten (10) months to 2021, foreign investors accounted stocks deals worth N329.62billion or 21.34percent of the total value traded on the Bourse while local investors traded equities worth N1.215trillion or 78.66percent of the total stocks traded on the NGX same period in 2021. The value of foreign investors transactions in review period was N349.59 billion, representing 16.81 percent of the total value of stocks traded in same 10 months period.

Nigeria’s equities market has seen depressing performance lately due to elevated yields in the fixed-income (FI) market and investors’ waning appetite for risk as the 2023 presidential election approaches.

The Monetary Policy Committee (MPC) of Nigeria’s Central Bank on Tuesday November 22 concluded its final meeting for year 2022. After the two-day Monetary Policy Committee meeting, MPC raised its benchmark interest rate, known as Monetary Policy Rate (MPR) by 100 basis points to 16.5 percent, the fourth straight hike this year.

The decision was in consideration of the persistent rise in inflation rate and fragile economic growth. Nigeria’s headline inflation accelerated to the highest level in 17 years to 21.09 percent in October 2022, from 20.77 percent in the previous month.

While global growth outlook appears to have been weakened by monetary policy responses to inflationary pressure that has depressed stocks valuations, the bearish momentum seen on the stock exchange could create long-term opportunities for value hunters.

Read also: Nigerian Breweries, others cause market’s N93bn gain as week opens

Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), who announced the decision after the meeting said, “the MPC noted with concern the continued aggressive movement in inflation, even after the three consecutive time rate hikes at its previous meetings. He expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.”

Equities market mood remains largely bearish given the low level of activities on the Bourse as investors continue to favour the fixed-income market given the attractive level of yields.

For analysts, the mood in the equities market remains bearish

“Investor aversion to domestic equities was firmly centre-stage in October, despite fairly encouraging third-quarter (Q3) 2022 earnings. The performance was strongly reminiscent of July’s, albeit with the benchmark index now truly settled in correction territory—the fourth time since June 2018.

“With fixed-income auctions gobbling up supports to system liquidity, limited buying interests invariably led to slumps in the NGX All Share Index (-10.6percent month-on-month (MoM) and NGX 30 (-9.6 percent MoM),” CardinalStone analysts said in their November 7 note.

“In our opinion, the mood in the equities market remains bearish. The gains recorded last week was mainly driven by buying interests on bellwether stocks,” according to analysts at Lagos-based research Meristem in their November 21 note.

However, Meristem analysts did not rule out the possibility of bargain-hunting activities, especially on heavy-weight tickers. “Moreso, the coupon payment of circa N18 billion is expected to increase system liquidity during week. Overall, we expect the market to close in the negative region this week,” the analysts said.

“We maintain our pessimistic outlook for the equities market as the market remains unattractive to investors amid the prevailing rising yield environment.

“We posit that the MPC’s decision in its November 22 meeting is a crucial factor that will determine the direction and tone of the local bourse going forward,” United Capital analysts said in their investment view for this week.

Recently, while showing how total returns affect an equity portfolio, Coronation Research analysts in their November 21 note to investors said: “Choosing a portfolio for outperforming stocks is the most important thing for a portfolio manager to achieve, but reinvesting dividends puts the icing on the cake so long as the market is trending up”.

“Last week we wrote that the market is in bad shape. It appears to be in better shape now, given its trend over the past fortnight. While we try, as much as possible, to avoid making calls on the entire market, it does appear that the downturn that began at the end of May has run its course (the NGX All-Share Index reached a high for the year of 54,085.30 points on May 27) and is now reaching support levels (having reached a low for second half of the year of 43,461.60 points on November 8, 19.6percent below its May high).

“In other words, we might be able to put a time frame around the correction which was inspired by May’s rise in the Monetary Policy Rate (MPR) and subsequent rises in market interest rates between then and now. Being underweight the market over the past four months has paid off in terms of outperformance (if not absolute performance). On May 27, we had a notional cash position of just 3.5percent and had outperformed the market by 149 basis points (bps): by last Friday the notional cash position was 28.1percent and we had outperformed by 506bps year-to-date,” the analysts stated.

“Now the problem is the reverse: if the market rallies we may be caught without enough equities. Therefore, over the coming week, we will work to neutralise our underweight position in the banks, and reverse the underweights that we earlier constructed in Airtel Africa and Dangote Cement.

“We will make notional purchases to increase the holdings of the bank stocks we already have in order to create index-neutral positions, rather than making purchases of bank stocks not already featured in the portfolio. As the end of the year approaches, we will run down our notional cash position and move in the direction of a largely index-neutral portfolio for the beginning of next year,” Coronation Research analysts said.

Buy interest in some stocks seen pushing prices higher

Some stocks on the Nigerian exchange have impressed the market this year, outperforming the entire market. The stock market opened this week on a positive note pushing higher its year-to-date (YtD) positive return to 4.65percent.

While all insurance stocks are in negative year-to-date, in the banking sector, for instance, Fidelity Bank has risen this year by 60.8percent as at Monday, November 21. Other banking counters that have risen this year are: FCMB (+8.7percent), Jaiz Bank (+58.9percent), ETI (+14.9percent), Union Bank (+11percent), and Wema Bank (+331.9percent). Among other financial institutions, United Capital has risen YtD by 22.2percent.

Among the Industrial Goods stocks, BUA Cement has risen this year by 7.4percent and Meyer (+393.5percent). Cadbury, which has risen this year by 25percent is among the consumer goods stocks that have impressed the market. Others are: Champion Breweries (+48.9percent), Guinness (+56.4percent), PZ Cussons (+53.3percent).

Oil & Gas stocks that have also outperformed this year are: Ardova (+6.9percent), Conoil (+20.5percent), Eterna (+12.3percent), MRS (+14.2percent), and Seplat Energy (+67.5percent).

In the Agriculture sector, investors in Okomu Oil Palm shares have seen 18percent gain this year, while those that are holding Presco have recorded 37.2percent capital appreciation this year. SCOA with 24percent gain this year is leading returns in the Conglomerates followed by Transcorp (+17.7percent). In the health care sector, Fidson has risen YtD by 31percent, followed by GSK (+5percent).

In the Telecommunications sector, Airtel Africa despite being one of the major causes of the ‘black October’ has risen this year by 33percent. For Natural Resource sector, Multiverse has advanced by 1900percent this year. In the Services sector, Academy Press is up 154percent YtD, Learn Africa (+41percent), and NAHCO (+51.1percent).

Analysis of equities transactions month-on-month

Look at equities trading month-on-month (MoM), from a high of N323.38 billion recorded in January 2022, the value of equities transacted in October came to a low of N110.09 billion.

It was N183.56billion in February, March (N185.26billion), April (N205.88billion), May (N607.45billion), June (N156.52billion), July (N101.18billion), August (N123.97billion), and September (N81.90billion).

As at October 31, 2022, total transactions at the nation’s bourse increased by 34.42percent from N81.90billion (about $248.50million) in September 2022 to N110.09billion (about $64.45million) in October 2022.

The performance of the review month when compared to the performance in October 2021 (N213.07 billion) revealed that total transactions decreased by 48.33 percent.

In October 2022, the total value of transactions executed by domestic investors outperformed transactions executed by foreign investors by about 48 percent.

Further analysis of the total transactions executed between the current and prior month (September 2022) revealed that total domestic transactions increased significantly by 31.03percent from N62.23billion in September to N81.54billion in October 2022.

Similarly, total foreign transactions increased by 45.14percent from N19.67billion (about $44.93million) to N28.55billion (about $64.45million) between September 2022 and October 2022.

A comparison of domestic transactions in the current and prior month (September 2022) revealed that retail transactions decreased by 29.64percent from N34.18billion in September to N24.05billion in October 2022.

However, the institutional composition of the domestic market increased by 104.96percent from N28.05billion in September 2022 to N57.49billion in October 2022.

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