CBN building

It is boom time once again. The equities market has defied the odds. In the last two weeks the market went into a frenzy, gaining 27.60% year to date. The market capitalization has also surged by 40.30%. Many still remember that the All share Index started the year as low as 26,867.79 while market capitalization stood at N12.970 trillion.
Investors are once again smiling to the banks as they reap huge returns from capital gains even as the twin key indexes have jumped to 34,250.74 points for the NSE ASI, and N17.9 trillion for market capitalization, as at December 10, 2020.

Looking at the trading activities, the market capitalization had peaked at N18.467trillion before it eased. Industry observers however noticed that the NSE ASI had stood at 22,956.66 in March from where it rose to 34,250.74 points by Friday December 11, 2020. The ASI had stood at 35,059.33 and 34,588.42 points in January 2007 and November 2014 respectively, and this is what makes its performance significant this time around.
The sectors are not left out in this bull-run which has made investors as happy as it has also evoked fear. Individual stocks which a few weeks ago was almost at their lowest ebb in terms of price, are also effectively competing to be counted among those that have become attractive. This bullish trend this year is unprecedented despite the ravaging effect of the corona virus pandemic which has caused millions of deaths all over the world. There is also the weakening effect of the plunging price of crude which is the major revenue earner of Nigeria.

The sudden turn of the market to a positive disposition has been hinged on some issues which seem to have favoured the equities market.
There is a consensus that the new policy of the CBN which bars domestic institutional investors from participating in Open Market Operation (OMO) and the cutting of interest rates have shifted funds to the equities market.
There is also the view that the opening up of the economies in Nigeria and other developed countries after the lockdown may be helping funds to trickle into the market.

Some analysts have also noticed that because the bond market is not as attractive given that rates have declined, this is also an advantage to the equities market as some funds from this area is diffusing into the equities market.
These developments market observers say are expected to nudge banks to resume lending to liquefy the economy. Ordinarily, whenever there is liquidity, the economy becomes lively and some percentage of it finds its way into the capital market.

A substantial part of these monies, a top market analyst said, “would end up in the Capital Market”

BH recalls that far-reaching measures were deliberately taken by the CBN to buoy the economy. On the market resurgence, the Chief Executive officer, the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema said the market was riding on some positive policies of the CBN and the opening up of economies in the world in addition to the strong fundamentals of the companies to turn around the market.

‘’The Nigerian economy and the market like every other economy in the world have been greatly impacted by Covid-19 and associated economic challenges. So, we saw a lot of volatility in the market similar to other markets in March, the same time frame when the Covid-19 actually hit Nigeria.

Since then a number of policy changes have occurred and as the world is now in a recovery mood and economies are opening up we are seeing investors react to these policy changes. And as you know the markets are forward indicators of what will happen in the economy.
‘’So, the equities market is reflecting that. I must say some of the policies I made reference to include the CBN policy that domestic institutional investors should stop participating in the OMO market. That has driven significant funds into the NTB market. Some of these have found their ways into the equities market. We have also seen cut in interest rates. That is a significant move to support equities as an asset class because what investors tend to do is to look for yields and returns, more so, as the Nigerian economy has shifted into a negative real interest environment.

‘’ With those types of cuts you must look for investments that will give you higher yields and higher returns. Given the record dividend yields that are available in the Nigerian market and given the strong fundamentals of a number of the companies that are listed on the exchange it makes sense that as investors try to re-balance their portfolios they will look at equities.

There are also a number of fiscal policies that have happened that are very supportive of the market. So, I commend the CBN and the CBN Governor for their thoughtful leadership and generally their leadership in attacking the pandemic and taking measures to cut interest rates”.
The one million naira question now however is how sustainable will the seemingly bullish trend be? This is what investors seem to be asking.

Analysts have expressed their reservations and do not want to be carried away by what could be described as a flash in the pan. The Nigerian economy has not been strong and no immediate indication shows that.
Many are seemingly certain that the economy is likely to remain in recession for a while. Despite IMF’s reversal of the Nigeria’s 2020 economic growth forecast from -5.4 per cent to -4.6 per cent, the harsh conditions that were there before Covid-19 are still strong and pervasive in the operating environment.

Analysts believe it has become hard for firms to fly in such weak economies as Nigeria where the economy which has already shrunk by -6.1 per cent in the second quarter 2020 is expected to slide into recession ; where inflation is hitting the roof top at about 13 per cent; where the Naira has lost value and vigour; where the budget deficit stood at -4.69% of GDP; where insecurity has halted business activities in some parts of Northern Nigeria; where unemployment remains very high; where government is unstable; where economic policies are done to favour a section of the country.
Recently, the government has hiked the prices of fuel and electricity for the masses of the country with 82 per cent of its population in the poverty bracket. Though a slight reduction has followed, the knock-on effects remain.

‘’Who would expect companies to perform magic in a country where its citizens appear to have lost hope’’, a senior civil servant who would not want to be mentioned in print.

Also, youths had taken to the streets of Nigeria protesting against bad governance which they tagged ENSARS (An arm of the police that has allegedly killed many young people indiscriminately under the guise of taking on armed robbers).

This is in addition to the wobbling price of crude which for a while hovered between $38 to over $40 pbd, and which is the main survival of the Nigerian economy. Though there has been a slight improvement in the figures recently, its knock-on effects are yet to be felt on the markets and streets.

Managing Director of HighCap Securities limited, Mr. David Adonri who shares the views of the CEO of the NSE told Business Hallmark that the market surge may have been propelled by the expansionary measures of the CBN in reducing the interest rates from 12.5 per cent to 11.5 per cent.

He also explained that some bond holders have returned monies and yields they made for re-investment in the equities market.

According to him, the N2.3trn palliative to MSME has also increased the volume of money in circulation which the real sector lacks the capacity to absorb.
These measures Adonri said pumped more money into the system which found their way back into the equities market.

Adonri said that most of them are skeptical given that surge will not be sustained because the liquidity flow cannot be consistent given the weak economy.

‘’We know that the market surge will not last since the above measures are temporary. We are really skeptical’’ he said.

In the recently released NSE Domestic & Foreign Portfolio Investment Report for September, total value traded surged in line with expectations as value traded grew 42.9% m/m to N135.0bn (US$350.6m) in September 2020 from N94.5bn (US$245.5m) in August 2020.
Activity level among domestic investors grew 71.1% m/m to N94.9bn (US$246.5m) while foreign investor transactions grew 2.7% m/m to N40.1bn (US$104.2m).

Domestic investors retained dominance of trading activities on the local bourse as their share of total transactions in September stood at 70.3% (YTD; 61.8%) while foreign investors’ share of total transactions was 29.7% (YTD; 38.2%).
On the domestic front, transactions were dominated by institutional investors who traded N59.2bn (US$153.8m) while retail investors executed transactions worth N35.7bn (US$92.7m). We note that volume of transactions among retail and institutional investors grew 34.1% and 105.2% respectively. Foreign outflows increased to N26.1bn (US$67.8m) in September compared with N21.3bn (US$55.3m) in August. Foreign inflows decreased to

N14.0bn (US$36.4m) in September from N17.7bn (US$46.0m) in August resulting in a net outflow of N12.1bn (US$31.4m) in September compared with a net outflow of N3.7bn (US$9.6m) in August.
This surge in activity levels supported a strong bullish performance in the local bourse in September. The benchmark All Share Index gained for the fifth consecutive month, climbing higher by 6.0% in September. In September, OMO maturities of N1.3tn hit the financial system which provided a number of local institutional buyers with some liquidity to take positions in undervalued stocks which led to price upticks across large cap stocks.

Going forward, we expect local institutional investors to continue to dominate activities in the domestic bourse. However, we note the robust liquidity driven by huge OMO maturities would begin to subside in November as CBN’s ban on domestic non-bank investors from accessing the OMO window started in November 2019, which means local investors no longer expect OMO maturities after November.
That said, we think the local bourse’s performance in the last quarter would be largely dictated by the Q3 financial performance of bellwether stocks.
On the international arena Bloomberg noted that Tech shares led U.S. equity indexes higher, with the stay-at-home trade gaining appeal as investors weighed the impact of tougher virus restrictions on economic growth along with the outlook for widespread vaccine distribution within months.

It added that advances for Microsoft Corp., Amazon.com Inc. and Adobe Inc. lifted the Nasdaq 100. Tesla Inc. rose to a record as investors bet that the global car market will be dominated by electric cars in decades ahead. The S&P 500 Index edged higher, but underperformed the tech-heavy gauge as investors sought out shares of companies poised to do well during lockdowns.

‘’Treasury yields slipped and the dollar dipped after U.S. weekly jobless claims came in higher than forecast. Gold dropped for a fourth day amid a drawdown in bullion-backed exchange-traded funds.

‘’The bullish fever that lifted the MSCI World Index to an all-time high Monday has softened, with virus cases surging in many parts of the world and public health facilities being pushed to the brink. New York City announced it will close schools and South Australia began one of the world’s toughest lockdowns, with even outdoor exercise and dog-walking banned. In Tokyo, the virus alert was raised to the highest levels as daily infections topped 500 for the first time.’’
It all means that investors are grappling with how long and how severe the pandemic will be in the months ahead. There’s plenty of economic stress now as businesses struggle under lockdowns, but scientists are also rapidly advancing several vaccine candidates to get life back to normal.

However, there is fear that the market may be far disconnected with the realities on ground given the ravaging effect of Coronavirus pandemic and the low price of crude.

In a report published Thursday as reported by the Bloomberg, the International Monetary Fund noted progress on a vaccine, but also said elevated asset prices point to a disconnect from the real economy and a potential threat to financial stability.
“While global economic activity has picked up since June, there are signs that the recovery may be losing momentum, and the crisis is likely to leave deep, unequal scars,” officials at the Washington-based fund said. “Uncertainty and risks are exceptionally high.”

In Europe, cyclical shares led stocks lower. Norwegian Air Shuttle ASA plunged 16% after seeking protection from creditors amid the travel upheaval caused by the pandemic.
In other markets, the MSCI Asia Pacific Index fell for the first time in 14 days, ending the longest winning run since 1988. Commodities dropped and Bitcoin steadied after surging past $18,000 on Wednesday.

Turkey’s lira strengthened after the country’s new (central bank governor raised the benchmark interest rate.

BH recalls that in the corresponding period of 2008, the market maintained a bullish disposition and investors smiled to the banks.

The major indicators attained unprecedented heights.
The market capitalization peaked at about 13.1trillion and the Allshare Index gained a giddy height of 66,551.84 basis points on March 5, 2008. Most of the equities grew bullish and the Nigerian Capital Market was thrown into frenzy.
The market became the toast of the Nigerian Business community, with traders, civil servants, farmers and even students making equity investments.
Many analysts note that the Nigerian Stock Exchange (NSE) has become a beehive of activities with both investors and speculators scrambling to make a kill. Some individual stocks recorded over 100% appreciation while others edged up by 50% and above.
The one million question in the mouth of many, is how sustainable is the bullish market?