Last Tuesday (August 29, 20223), the Nigerian Exchange Limited (NGX) witnessed a historic moment as its All-Share Index (ASI) reached a new all-time high of 66,490.34 points, surpassing the previous record of 66,371.20 points that was set on March 5, 2008.

     

    The ASI, which measures the performance of all listed equities on the NGX, rose by 0.51% from 66,151.38 points on Monday, reflecting the bullish sentiment that has dominated the market in recent months.

     

    This remarkable feat was not a fluke or a coincidence, but the result of a series of factors that converged over the last year to create a favourable environment for the capital market.

     

    In this article, we will examine some of these factors and their implications for investors and the economy. 

     

    What has changed since 2008?

    The last time the NGX hit this level was 15 years ago when the stock market boom was largely fueled by margin lending and speculative activities. Banks, which had just undergone a recapitalization exercise, lent heavily to investors who gambled on the continued rise of stock prices.

     

    However, this bubble burst in 2008, following the global financial crisis and the collapse of oil prices. The ASI plunged from 57,990 points at the end of 2007 to 20,827 points at the end of 2008, wiping out trillions of naira in market value and leaving many investors in debt.

     

    Since then, the stock market has struggled to recover from the crash, posting negative returns in most years and lagging behind other emerging markets. Between 2007 and 2022, the ASI recorded a cumulative loss of –11.6%, indicating that investors who bought stocks in 2007 would have lost money if they held them until now.

     

    However, things started to change in 2020, when the ASI gained 50.03%, making it one of the best-performing markets in the world. This momentum continued into 2021, though modest, as the ASI gained another 6.07%.

     

    In 2022, stocks staged another rebound gaining 19.98% YTD. Thus, between 2019 and 2022 the ASI had more than doubled from 26,842.1 to about 51,251.1.

     

    What are the drivers of this bull run? Unlike the previous bull run, which was driven by unsustainable factors such as margin lending and speculation, the current one is supported by more fundamental factors that reflect the growth potential and resilience of the Nigerian economy and its corporate sector.

     

     

    Some of these factors include

    Economic recovery: After experiencing two recessions in five years, Nigeria’s economy rebounded strongly in 2021 and 2022, growing by 3.4% and 3.1% respectively.

     

    This was driven by the recovery of trade, construction, telecoms, and financial services sectors. This was also aided by the easing of lockdown restrictions.

     

    The improved macroeconomic outlook boosted investor confidence and increased demand for equities as investors poured in hundreds of billions acquiring stocks that had been beaten down to multi-year lows following the Covid-19 lockdown.

     

    Low-interest rates: The Central Bank of Nigeria (CBN) maintained an accommodative monetary policy stance throughout 2021 and 2022, keeping its benchmark interest rate at 11.5% between September 2020 and April 2022.

     

    This resulted in low yields on fixed-income securities such as treasury bills and bonds, making them less attractive to investors. As a result, many investors shifted their funds to equities, which offered higher returns and capital appreciation.

     

    Despite eventually raising monetary policy rates over 7 times, between 2022 and 2023 to 18.5%, yields for government securities remain abysmally low when adjusted for inflation.

     

    Money supply: Following the COVID-19 pandemic, the central bank joined its peers across the globe to increase money supply in a bid to jump-start economic recovery.

     

    The CBN monetary policy aided money supply expansion in the economy through various interventions and stimulus measures to support businesses and households affected by the pandemic.

     

    This increased liquidity in the financial system and created excess funds for investors to deploy to the stock market. 

     

    Institutional investors: The surge in the stock market is largely attributed to the heightened involvement of domestic investors, who have been more active than their foreign counterparts.

     

    Data from the NGX reveals that domestic investment transactions totalled an estimated NGN 6.8 trillion (USD 8.98 billion) from 2020 to July 2023. This far outweighs the NGN 1.729 trillion (USD 2.28 billion) in foreign transactions recorded during the same period.

     

    Last year, institutional entities such as pension funds, mutual funds, and insurance companies, along with foreign portfolio investors, led the investment activity, surpassing retail investors by a margin of 30%.

     

    These well-funded institutional players typically allocate their resources to blue-chip stocks known for their robust fundamentals and reliable dividend yields. Supporting this trend, SEC data indicates a sharp increase in the net asset value of equity funds, climbing from NGN 16.1 trillion (USD 21.25 billion) in December 2022 to NGN 21.9 trillion (USD 28.91 billion) as of August 2023.

     

    Pension funds: In Nigeria’s capital market, pension funds stand out as one of the most substantial institutional investors, boasting assets under management (AUM) that eclipsed NGN 16 trillion (USD 21.12 billion) as of June 2023.

     

    On average, these pension funds allocate approximately 10% of their AUM to equities. Recent months have seen an uptick in this allocation, driven by diminishing returns on fixed-income securities and appealing stock valuations.

     

    By June 2023, their investment in equities had swelled to around NGN 1.2 trillion (USD 1.58 billion), a notable increase from the N900 billion recorded in December 2022. This leap of NGN 500 billion (USD 0.66 billion) is substantial enough to have a rallying effect on the equity market.

     

    Investor Activism: Earlier this year, billionaire investor Femi Otedola made headlines by acquiring a majority stake in Transcorp Plc, setting the stage for a potential power struggle with fellow billionaire Tony Elumelu.

     

    The two ultimately brokered a mutually advantageous agreement that led to Otedola’s departure from the company.

     

    This high-profile transaction reverberated through the equities market, prompting other wealthy shareholders to consolidate their ownership stakes as a defensive measure against unexpected takeovers.

     

    This activity has exerted a significant influence on share prices. As investors rush to solidify their holdings, they often end up acquiring additional shares, frequently at elevated valuations.

     

    Fuel subsidy removal: On May 29th, 2023, Nigeria’s President, Bola Ahmed Tinubu, used his inaugural speech to announce the removal of the country’s long-standing fuel subsidy.

     

    Previously viewed by many economists as a significant hindrance to economic growth, the fuel subsidy had also been a major source of fiscal stress and corruption for decades.

     

    The subsidy’s removal is anticipated to free up billions of naira for the government, funds that could be redirected toward other developmental projects and programs.

     

    This move also paves the way for deregulating the downstream sector of the oil industry, fostering increased competition, efficiency, and innovation.

     

    Investors welcomed the news enthusiastically, propelling the All-share index upward by 9.32% in June alone.

     

     

    Exchange rate unification: In June 2022, the Central Bank of Nigeria (CBN) consolidated its multiple exchange rates into a single market-driven rate, known as the Investors’ and Exporters’ (I&E) window rate.

     

    This unification served to eliminate market distortions, arbitrage opportunities, and rent-seeking activities in the foreign exchange sector. It also enhanced transparency, liquidity, and overall market confidence.

     

    Investors viewed this change as a pivotal step in encouraging the return of foreign portfolio investors, prompting domestic investors to strategically position themselves in anticipation.

     

    While the expected influx of foreign investors has yet to materialize, domestic investors remain confident that it is only a matter of time.

     

    TinuBULL: Nigeria’s current president is currently enjoying an unusual period of market favour, as the equities market has posted gains for four straight months.

     

    This positive trend is closely tied to investor sentiment, which suggests that the president’s economic policies are market-friendly and likely to improve the overall investment landscape.

     

    The president’s notable decisions, like the removal of the fuel subsidy and the unification of exchange rates, have contributed to a more optimistic outlook on the country’s economy among investors.

     

    These actions have been received as positive steps toward creating a more stable and attractive investment environment.

     

    SWOOTs Activities: Stocks Worth Over One Trillion, also known as SWOOTs, account for approximately 65% of the total market capitalization of the equities market, boasting a combined market cap of around NGN 25 trillion (USD 33 billion). When these powerhouse stocks perform well, they lift the entire equity market.

     

    This year has been especially significant, as GT Bank, Zenith Bank, and Seplat have newly ascended to the ranks of SWOOTs, with their combined market valuations nearly doubling.

     

    While not yet a SWOOT, Geregu Power has also made a noteworthy impact on the equities market. Valued at NGN 800 billion (USD 1.06 billion), this newcomer has become a significant player since its listing in September 2022.

     

    MARKET STATUS: CLOSED

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    🇳🇬 Nigerian Naira



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