Nigerian equity has sustained rally for two consecutive weeks.

By FELIX OLOYEDE

…gains 11% in two weeks

The deal reached by members of the Organisation of Petroleum Exporting Countries (OPEC) and non-members, jointly called OPEC+ penultimate week, to cut oil output by 10 million barrels, and the Central Bank of Nigeria’s pronouncement that it will inject stimulus in the country’s economy, have helped in renewing investors’ confidence in the Nigerian equity market.

The Nigerian capital market has appreciated almost 11 per cent in the last two weeks as investors cherry-picked cheap stocks, even though it has shed 14.61 per cent this year. Last week alone, investors in the bourse were richer by ₦801 billion as it was up by 7.19 per cent.

Portfolio investors turned their backs on emerging markets, especially those whose economies are hinged on commodities, due to the sharp drop in oil prices, caused by glut and low demand due to the coronavirus pandemic.

Oil price plummeted to 18 years low of $22 on March 31, forcing OPEC members led by Saudi Arabia and non-OPEC members headed by Russia to hold a four-day extraordinary meeting, where they agreed to cut output by 10 million barrels. Brent crude price settled at $25 on Friday.

Moses Ojo, Chief Economist/Head, Investment Research at PanAfrican Capital Holdings, believes that though oil prices have improved significantly, hinging the current recovery in the Nigerian equity market on the agreement by OPEC+ to address the challenge of glut by scaling down output by 10 million barrels.

“There are a lot of speculators in the Nigerian equity market. The current trend is not expected to last long, because soon investors will start taking profits, which will bring back downward trend. In the medium term, the uptrend is expected to last as long as the positive reaction continues,” he explained.

Ayodele Akinwunmi, Head, FSDH Merchant Bank, attributed the market resurgence to policies pronouncements by different central banks on plans to reflate their economies after the COVID-19.

The Central Bank of Nigeria (CBN) in March announced that it will inject N1trillion across all critical sectors of the country’s economy. It also disclosed that it will be floating an infrastructure bank to address the huge infrastructural deficit in Nigeria, which would help the country’s economic diversification drive.

“Another reason for the resurgence of the equity market is that investors cashing in on the significant drop in the values of many stocks. They are thinking that, though the stocks had fallen from a year high to a year low, they may not drop to year low again,” he noted.

The fixed income market, which is another investment outlet is weak with yields on the benchmark bond compressing by 0.09 per cent on the average on Thursday as supply remained inadequate to match demand.

Akinwunmi also reasoned that investors have chosen to stay with the equity market which has a high return potential when compared with the fixed income market, which currently has a return below the country’s February inflation of 12.2 per cent.

David Adonri, Managing Director, Highcap Securities Limited, believes the market has reached its natural level of resistance because there was nothing significant that would propel the current return.

“Things are also looking up a little bit because the major countries that control the global economy, which affect the performance of the Nigerian equity market, are beginning to put their heads together. That could be seen in the crude oil market which moves in the same direction with our market,” he asserted.

“We have spent a long time (since last November) arguing that some of the top bank stocks have excellent dividend yields: it was not as if, having ignored this advice for five months, the market suddenly paid attention. News of other markets rebounding might have had something to do with it, or rumours (which turned out to be true) of an impending deal involving OPEC, Russia and the USA to cut global oil production. Quite possibly, domestic investors saw the NSE-ASI edge down close to the level of 20,000.00 and thought that enough was enough. The low point of 20,669.38 was reached on Monday 6 April,” analysts at Coronation Merchant Bank maintained on the current performance of the Nigerian market.

Analysts at GTI Securities, however, have projected that the market may reverse this week after seven consecutive trading sessions of gaining streak, despite COVID-19 lockdown, as some investors would exit their position, not minding the attractive valuation of many equities.

The International Monetary Fund (IMF) in its Regional Economic Outlook for Sub-Sahara Africa, titled COVID-19: An Unprecedented Threat to Development, which was released recently, said coronavirus pandemic would largely disrupt production, which may cause workplace closures, disruption of supply chains, and reduction in labour supply because of sickness or death.

“Furthermore, a lockdown can have a devastating effect (for example, food insecurity) on vulnerable hand-to-mouth households with limited access to social safety nets. Meanwhile, the loss of income, fear of contagion, loss of confidence, and heightened uncertainty all reduce demand,” it stated.

“In addition, the sharp tightening of global financial conditions reduces investment flows to the region and hampers its ability to finance spending needs to deal with the health crisis and support growth. This may result in either a cut in government spending, a buildup in arrears, or an increase in government borrowing in local markets, with attendant consequences on domestic credit and growth. For frontier economies, the sudden stop of capital outflows are exerting exchange rate pressures and can result in a large current account adjustment through domestic demand compression and further balance sheets pressures in countries with large foreign exchange mismatches.”

It further noted that foreign remittance flows may also dip as global growth slows, reducing disposable income and adding to external pressures.

All these may adversely impact the year-end performance of the Nigerian equity market, despite the current resurgence.

World Health Organisation (WHO) had said Africa could be the next epicentre of the COVID-19 pandemic. The continent has had 13,104 confirmed cases and 616 deaths as of April 18. And Nigeria has recorded 493 confirmed cases with 17 deaths.

Lagos which is the commercial hub of the country and Abuja, the seat of government with Ogun, which is a next-door neighbour to Lagos, have been on the total lockdown for over three weeks.