Okey Onyenweaku
The seeming state of frenzy in the Nigerian equities market which has resulted to a near extreme bullish trend may be correcting, BH checks have revealed.
Since the swearing in of President Bola Tinubu on May 29, 2023, the equities market has recorded unusual gains of over 17 per cent in just two months. Market observers believe the equities market was swiftly responding to the new policies of floating of the forex regime and the removal of fuel subsidy that some Nigerians seem to conceptually support.
With the NGX All share Index growing from 55,738.35 points to 65,669.29 and trending towards a bubble, discerning market observers were however worried that the consequences may be grave in no time.
A careful observation of the market trend shows the bourse has returned over 27 per cent year-to- date from 51,595.66 to 65,669.29 points. This is unprecedented, many market observers have said. Whereas the extreme bullish trend paused a few days ago when the NGX All share index dropped sharply by 2.4 per cent from 65,669.29 on July 11, 2023 to 64,046.93 as at July 12, 2023, the market has fully recovered and is still raging.
The NGX All share index’s ability to resurge that quickly from 64,046.93 to 65,991.02 on July 25, 2023 has raised concerns of a bubble lurking around the corner.
Experts believe that a bubble situation occurs in an economic cycle when there is rapid escalation of market value, particularly in the price of assets. According to them, stock market bubble involves equities —shares of stocks that rise rapidly in price, often out of proportion to the companies’ fundamental value.
As a result, some market stakeholders are wondering what strong sentiment could be driving the value of the market especially presently, without strong fundamentals.
Business Hallmark research shows that discerning investors usually exercise caution during abnormal market rage without clear and tangible fundamentals even though second quarter results which are trickling in could somehow be fingered for little movement in equities.
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 All share 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 throwing in monies (making investments) into the market with indiscretion.
Many analysts noted that the Nigerian Exchange group (NGX) became 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.
But the story suddenly changed. The market came crashing and inflicted unforgettable wound on investors. In fact, while some people lost their lives in the process, some others lost their capital and never recovered. While the NGX has not yet become a beehive of activities comparable to that 2007/2008, analysts fear the present market trajectory may not be far or different from the 2007/2008 market bubble.
What does the economy offer?
Overall, the Nigerian economy remains in dire straits. About 60%(100m-130m) of Nigerians are wallowing in extreme poverty; food production is expected to decline given fertilizer shortages due to the Russia/Ukraine war and insecurity; Nigeria has also not fully recovered from the devastating impact of Covid-19; the growing insecurity which has hampered agricultural activities is taking a different toll on Nigeria’s food security; food inflation according to NBS stood at about 24.03%; over N12trillion deficit is tugging at the N21trillion budget for 2023; debt servicing takes over 95 per cent of revenue; the value of the naira keeps declining to about N800/a dollar due unification of exchange rate policy and the Country remains unproductive; unemployment and underemployment rates have gone far beyond the 33% and 23% respectively.
While headline inflation continues to jump to about 22.7% fueled by removal of subsidy with a litre of pms from N195 to over N600, total remittances drops 21 per cent to $952million in half year 2023. This amount is still low compared to $23billion recorded in 2019. To be precise, Nigeria’s total capital inflow for the first quarter of 2023 dropped by 28 percent given the latest report of the National Bureau of Statistics.
Details show that capital inflow for the first three months was $1.13billion – a drop of $441 million compared to the corresponding period of 2022 which stood at $1.5billion. FG targets total debt stock is estimated at N77trn and still growing.
Even with Nigeria’s recent revenue surge which hit about N5.5trillion in half year 2023, the country still services its huge debt with about 95% of its revenue. And most problematic is political instability in the country given the present legitimacy challenge that is bugging the Presidency.
The economic reforms have yet to affect the earlier ratings by international rating agencies. While seemingly positive ratings are expected,
ratings agency S&P on February 3rd 2023 affirmed Nigeria’s credit rating at “B-/B” but turned negative on its outlook, citing increasing risks to the country’s debt servicing capacity over the next one-to-two years. This situation may have worsened as more Nigerians have dropped into the category of multidimensional poverty bracket.
Similarly , Moody’s Investors Service downgraded Nigeria’s rating further as the global credit ratings agency believes the government’s fiscal and debt position to worsen given numerous challenges facing the government.
“Ultimately, the risk that a negative feedback loop sets in over the next couple of years between higher government borrowing needs and rising interest rates has intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items. The 2023 budget plans on an even larger fiscal deficit than in 2022, while the government’s funding options remain narrow and reliant on central bank financing. In addition, the government’s lack of access to external funding sources will add to the external pressure from depressed oil production and capital outflows, thereby eroding further Nigeria’s external profile over time. At this stage, immediate default risk is low, assuming no sudden, unexpected events such as another shock or shift in policy direction that would raise the default risk,” the review said.
The World Bank which had predicted a 2.8 growth for Nigeria in April 2023 has adjusted it up to 3.3 per cent in 2023 and 3.7 per cent in 2024 and 4.1 per cent in 2025.
This scary scenario does not favour equities market growth as market participants are wont to be lethargic about their investments. Nigeria today is in turmoil given the worsening macro-economic environment which has reduced significantly the value of Naira in peoples’ pockets. In fact, some financial analysts are doubtful that the market can sustain the current bullish momentum on empty fundamentals.
Many financial commentators have also expressed fear that the interest rate at 18.7 per cent will suffocate credit facilities and stifle funds from going to the real sector.
Foreign investors have remained on the edge and are not as comfortable to invest much in Nigeria given the weakness of the Naira which has reduced the value of their expected dividends and capital gains as most of them are reportedly divesting while others are waiting on the edge.
Some international agencies had also announced the deep risk in investing in Nigeria to the foreign investors as many of them may be considering moving their investments to other more viable investment destination.
Despite the excruciating pains that have befallen Nigerians, some analysts are really positive that the economy would turn around.
Bismarck Rewane, Managing director/chief executive officer of Financial Derivatives Company Limited, says the reform was expected to give hope to Nigerians who should expect better tomorrow.
He says the acting CBN Governor, Mr. Folashodun Adebisi Shonubi’s forex reforms was capable of boosting investors’ confidence.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited said,
“It is restoring confidence already. See what is happening in the Stock market, with massive appreciation in the equity prices and fixed income securities market,” “What we need now is to increase the supply of foreign exchange to stabilise the value of the Naira.” He added
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, is impressed that positive indications of a better management of the economy had started to manifest in the fiscal space.
However, the Vice President of HighCap Securities limited, Mr. David Adonri, reckons that whereas the market already shows signs of bullish moves, sounded a note of caution to investors to exercise care as the fundamentals of the market could not confidently sustain the current trend.
Unfortunately, on a realistic basis, pessimists still think the government economic vision has not really offered hope to the citizenry. Whereas the government is still struggling to implement its promises to lift the economy, the faces of Nigerian citizens still look frustrated and sour.
Findings by BH reveal that the market is still very weak and it is difficult to predict with any amount of certainty its future. However, it had gained 65% in 2003; 18.5%in 2004; 1.01% in 2005; 37.80% in 2006; 74.73% in 2007; and lost -45.77% in 2008. It also lost -33.80% in 2009 and took a rebound to gain 18.50% in 2010.The market slipped back in the negative by -17% in 2011, gained – 35.4% in 2012, gained 47.19% in 2013, lost by -16.14% in 2014 and closed in the negative by about -17.3% in 2015, -6.14% in 2016, +43.34% in 2017, -17% in 2018,-14.6% in 2019,+6.23% in 2020,+6.1% in 2021 and +19.98% in 2022.
Nevertheless, the Group Managing Director of the NGX group says “Opportunities still exist for investors in stocks, in spite of the current economic challenges in the capital market’’.
