For the first time in a long while, the indicators of the Nigerian Stock Exchange (NSE) recorded five consecutive days of upward movement, reminiscent of the 40 straight months of bull-run leading to the plunged that followed since March 5, 2008.

The NSE All-Share-Index notched 5.31 per cent, bringing year-to-date growth to 15.91 per cent, while equities' capitalisation garnered N292.837 billion, raising year-to-date growth to 16.52 per cent. Last week's rise by the exchange has returned the NSE to a prime position in terms of returns on investment across major global markets, at a time when most stock indices across the world could only boast of YTD of below 10 per cent.

Incidentally, the returns within the first quarter of the year, represents partial recovery from the 34 per cent slump in the All-Share-Index in 2009, a situation, which made it the second-worst market last year after West African neighbour- Ghana's. The decline, explained experts, resulted from the collapse in oil prices from a peak of $146 per barrel around July/August last year to about $43 per barrel of crude, which has remained Nigeria's mainstay, accounting for about 90 per cent of national revenue. The oil price drop, which led to many companies declaring losses during the global recession, was also mainly responsible for banking crisis, after most loans to refined petroleum products importers went bad, owing to currency fluctuations. Most who had borrowed money from banks at N116-118/$ were forced to repay at between N160-N180/$. Many of the company then had to report currency losses, which in the case of one quoted company with heavy import component, stood at about N6.66 billion, wiping out its profit for the entire year. With stock prices crashing, many stock speculators found themselves helmed in, resulting in bank toxic assets of over N1.5 trillion ($10 billion), according to estimates by New York-based research company- Eurasia Group.

According to indices tracked as of last Thursday by analysts at FSDH Securities Limited, when the NSE had YTD return of 13.63 per cent, made available to Daily Independent,showed that the Dow Jones Industrial Average could only muster 1.76 per cent returns; Standards & Poor's, 3.15 per cent; NASDAQ, 4.38 per cent; while the London exchange's FTSE 100 Index garnered 3.78 per cent since the end of last year. Among markets monitored within the period, only the Cairo Stock Exchange came slightly close to the NSE, garnering 9.50 per cent; the German DAS Index was flat at 0.48 per cent; Spanish SMSI lost 7.77 per cent; while the South Africa's JSE All-share was also flat at 0.89 per cent.

In a report to clients at the weekend, Abdulrasheed Momoh, equities analyst at TWR Stockbrokers Limited, noted interestingly that the sectoral indices "were able to clear their prior highs with little effort except for the NSE oil & gas and insurance."

He, however, hinted of the likelihood of last week's gains inspiring another round of profit-taking, noting that at weekend's level, "the major indexes are clearly overbought and extended, (as a result of which) traders should be very cautious about chasing stocks at these levels."

Notwithstanding, he added: "The bottom line is that they are also clearly showing strength," warning that although the overall market put up an interesting upward rally, setting new recovery highs, the stocks are now clearly overbought at this point. This is even, as he argues, "they have continued to show amazing resiliency and have closed higher almost every day for the past months."

"Short term traders continue to be punished with how persistent the markets have been in moving higher. Rather than staying in a range, several market sectors have moved to new highs and most of the major indexes are following suit. We expect to see the first signs of weakness this coming week," he added.

A report by Meristem Securities' analysts explained last weekend that the sharp rise was propelled by the banking sub-sector with 13 per cent YTD return; food, 16 per cent, cement, 19 per cent; and conglomerates sectors, 17 per cent

"As a group, the four sectors, in addition to Breweries, control about 78 per cent of market direction," the report added, a situation, which they say explains the significant impact their return profile portends on the overall market.

An examination of market-wide returns on the NSE last week revealed that Fidelity Bank was the biggest in terms of returns on investment for the period, rising by 18.3 per cent to close at 303 kobo each. It was followed by Nigerian Bag Manufacturing Company, a subsidiary of Flour Mills of Nigeria, which notched 17.92 per cent closing at 250 kobo each; ahead of the 17.81 per cent rise in the price of quick service restaurants and confectioneries operator- Big Treat to close at 86 kobo; and Benue Cement Company, 17.42 per cent at N58.77 per share. This is just as stocks in the banking sub-sector occupied 12 of the top 20 table of percentage gainers.

The rise continued on Monday, with capitalisation growing by N57.406 billion, and index by 238.37 points or 0.98 per cent, closing at N5.871 trillion and 24,380.09 points respectively.

Reasons For Robust Rise

International newswire- Bloomberg, in a report at the weekend linked last week's rise in the NSE index to demand for banking stocks, which has surged as investors take position following the progress made in the enactment of the much talked about Asset Management Corporation of Nigeria bill. The bill was passed by the House of Representatives on Wednesday, and passed through the second reading in the Senate, following which it was referred to the Senate Committee on Banking, Insurance and Other Financial Institutions, which working with Committees on Capital Market and Finance, is to schedule a public hearing. The progress by the bill in the Senate was after the Central Bank of Nigeria (CBN), a major sponsor of the bill which is part of the ongoing banking sector reforms, presented "financial compendium" demanded by the Senate. Thereafter, a report is to be submitted to the entire Senate within period of four weeks, paving the way for its passage after a third and final reading.

The CBN had explained in a statement last week to applaud progress made so far, that "the AMCON, is the principal vehicle for resolution of the solvency of asset quality problems that have risked the banking system in the last two years and it provides an alternative to the liquidation of distressed banks. In addition to purchasing non-performing loans from the banks, AMCON is a vehicle for recapitalizing these institutions. It also holds the promise of reducing the debt overhang on capital market operators thus giving the much needed stimulus to the capital market."

The statement signed by Mohammed Abdullahi, its spokesman expressed hopes that all skepticisms around the establishment of AMCON and unguarded speculations around political support for the reforms have been put to rest. The CBN also reaffirmed its resolve to continue receiving the total support and cooperation of the leadership and members of both arms of the National Assembly in its effort to restore and entrench financial stability and good corporate governance in Nigerian banks.

Momoh linked last week's growth in the NSE indicators to factors including the near actualisation of the long awaited AMC, which now seem a cure all to the capital market's malaise.

Another school, he continued, links the juicy rise in the indicators to the current Low interest rates in the money market, resulting from the decision of the Monetary Policy Committee at its recent two-day meeting on Tuesday, last week, to reduce the standing deposit facility rate by 100bp to one per cent. This is yet to stimulate credit extension by the banks, leading to a massive influx of fund into the system to further shore up liquidity culminating into the benchmark Nigeria Inter Bank Offer Rate (NIBOR) dropping to YTD low of 1.15 per cent from its 2009 average of 12.25 per cent last week. Other factors include a fall in money market rates with deposit rates sliding as low as two per cent, including fiscal allocation and N500 billion projected to support power projects have contributed to bringing rates to record lows.

This, Momoh said, is unattractive, forcing investors to move their funds to the volatile capital market in search of better returns, just as some analysts disagree, he continued, arguing instead that the growth is indeed a bull trap. These investors, he continued, point to the coming earnings season stocks in the NSE banking sub-sector, which accounts for 65 per cent of market capitalisation, following which investors might get trap in the current uptrend.

Speaking recently at a reception in her honour in Lagos, Ms. Arunma Oteh, Director-General of the SEC pointed to the need to further diversify the NSE by attracting oil exploration and telecommunication stocks, lamenting the over exposure of the Nigerian bourse to one sector, resulting in a situation where when the banking sub-sector sneezes, (as was the case when the CBN sacked eight bank chiefs last year, out of which seven are quoted on the NSE), the entire market catches cold.

Watch That Risk

The growth last week, according to Meristem's analysts, is coming at a time when events from the heightening political risk to the increased volatility in the financial market.

"Specifically, series of highly correlated events especially in the month of March have raised the level of uncertainty in the investment sphere and have come to re-define a number of variables in the economy with near-run ripple effects," the report added.

Conclusion

The quantum of progress made on the AMC Act and how it is able to assuage investors' fears, ability of the CBN to keep inflation, interest and exchange rates down, as well as the audited result of banking stocks in the coming days and weeks, will go a long way to determine what the reaction of investors will be. This is not forgetting that nothing is yet heard about the 2010 Appropriation Bill, suggesting that not much progress is being made after President Umar Yar'Adua submitted it to the National Assembly by proxy, a day before jetting out of the country for a 93-day hibernation in Jeddah, Saudi Arabia between November 23, last year and February 24, 2010.