The record rally in Nigeria’s stock market that has pushed its returns to about 40 percent so far this year looks set to moderate as fund managers consider taking sell positions in the market’s major drivers.
Juicy returns from the stock market since last year (45.90 percent) have made it attractive to many investors, many of whom are attempting to take lucky shots at the market this time after it became the best-performing globally.
“Looking ahead, we plan to take profits on Dangote Cement this week, gradually reducing our notional position to align with market weight. Also, as the full year 2023 earnings season gains momentum, we will actively monitor and adjust our positions accordingly,” said CardinalStone Research analysts in a note to investors on Monday.
They said their strategic move to increase position in Dangote Cement, based on last week’s recommendation, “proved to be quite the masterstroke as the stock singularly contributed 597 basis points to the Model Equity Portfolio overall performance”.
Although the market rose by 8.32 percent last week, the rally slowed in the last two trading days of the week.
“The rise in the market so far this year is out of proportion to rallies in previous years. There is no clear political or economic driver. We are inclined to prepare for a correction in February. The problem, of course, is that being underweight anything in this environment could be a recipe for disaster,” said Coronation Research analysts in their January 23 note.
“The more prudent approach is to wait for the first signs of a correction and then take profits; and then to concentrate on building overweight positions where there are fundamental grounds for outperformance. Now that we have seen the first signs of a correction in the bank sector, we will bring our overall position back down to neutral,” the analysts added.
The Nigerian Exchange Limited (NGX) All-Share Index and market capitalisation increased to 102,401.88 points and N56.04 trillion respectively.
Analysts said the stock market is now characterised by excessive optimism, overvaluation of assets, and speculative trading – all signs of a bubble.
“The current constant upward movement of the stock market is a trend that Nigeria’s Securities and Exchange Commission and Nigerian Exchange Limited must watch to avoid a repeat of another 2008 market crash,” an informed market participant said. He recalled that in 2008, when the market witnessed a crash, investors lost about N6.96 trillion within a space of nine months.
Lagos-based Futureview research analysts said investors must maintain a discerning eye. “Concerns about a potential market bubble arise as asset prices, such as stocks, surge beyond intrinsic values due to speculative trading.”
Leading the pack of companies with the biggest returns so far this year are Dangote Cement (138.5 percent), Wema Bank (92.3 percent) and Transcorp (84.6 percent).
Dangote Cement’s market capitalisation surpassed N13 trillion on Monday, with 17,040,507,405 shares outstanding at N763 per share as at the close of trading.
Despite expecting the market to sustain its positive momentum this week, hinged on buying activities across sectors, Lagos-based Meristem analysts said the significant decline in market breadth last week (0.72x versus 5.50x in the previous week) “indicates more losers than gainers during the week”.
“Thus, we do not rule out profit-taking activities, particularly on tickers that have realised substantial price appreciation during the period,” they added.
Billionaire investor Femi Otedola recently acquired Dangote Cement shares, saying it underscored the company’s potential. He emphasised long-term wealth preservation, export potential and shareholder value in Dangote Cement share acquisition.
The stock market has maintained a bullish trend since the start of the year across a majority of large, mid and small-cap stocks. Most of these stocks have beaten inflation in their returns. Inflation rate in Nigeria increased to 28.92 percent in December from 28.20 percent in the previous month.
Victor Ogiemwonyi, a retired investment banker and a former council member of the Nigeria Stock Exchange (now NGX), said: “Otedola has been the prime mover of prices in the Nigerian stock market currently; his foray into buying big into First Bank, Transcorp and lately, Dangote Cement has literally doubled and tripled the stock market valuation of these stocks, and in the case of Transcorp, where he threatened a takeover, the share price has gone up 8x.
“His actions suddenly woke investors to the potential value in Transcorp, which has attracted investors and threatened the major shareholder to put up a defence, by buying out Mr Otedola, at a premium and buying more shares to keep his majority shareholding. Whether the current price justifies the current market valuation will be seen very shortly.”
According to him, these activities are normal and the market has only responded to the law of supply and demand.
“There are many investors buying into very few good stocks in the market and prices have risen as expected. While the events making these possible are distortions in the economy, it is not a manipulation. There are too many players with different agendas in the market; that manipulation is far more difficult than people think. There is nothing unusual or manipulative about the market,” Ogiemwonyi said.
Despite the rally seen this month, FSDH Research analysts said they were cautious about the market outlook as “we expect investors to reduce exposure following the earnings results announcement.”
“We expect it to intensify if announced dividend payments underwhelm investors’ expectations. That said, improvements in the FX market and policy normalisation in the global economy could encourage foreign portfolio investment flows toward Nigerian equities,” the analysts said in their economic outlook for 2024.
Share prices change because of supply and demand. If more people are buying a stock (demand) than selling it (supply), then the price moves up. Conversely, if more people want to sell a stock than buy it, there would be greater supply than demand, and the price would definitely fall.
“2024 promises a delicate dance between opportunities and challenges. Growth expectations remain hinged on oil production, with the potential for increased refining activities acting as a potential catalyst. However, the removal of fuel subsidies and its inflationary impact, coupled with continued tightening of monetary policy, pose significant risks. Additionally, low net reserves raise concerns about the naira’s stability, adding to the uncertainty surrounding Nigeria’s economic outlook,” the Luke Ofojebe-led team of Vetiva research analysts said in a recent report.
Futureview research analysts said in their January 26 note that in this evolving financial landscape, equities investors face both opportunities and challenges, prompting a cautious approach. “Recognising signs of a bubble and navigating uncertainties is crucial to safeguard investment portfolios.”
According to them, the first step in navigating a market bubble is recognising its existence.
They said: “Various factors contribute to the formation of a bubble, including excessive market optimism, overvaluation of assets, and speculative trading. Equities investors should closely monitor these indicators to assess whether the market is entering bubble territory. Rapid price increases, indicative of potential market bubbles, should prompt caution among equity investors. Such instances, where asset prices experience sharp and unsustainable growth without a corresponding improvement in underlying fundamentals, necessitate vigilance.
“Furthermore, heightened speculative trading activity is a critical red flag for identifying potential bubbles. When emotions drive trading decisions rather than fundamental analysis, it becomes essential for investors to closely monitor trading volumes and assess the prevalence of short-term, high-risk strategies to accurately gauge market sentiment.”
