20 February 2013

Nigeria: Allaying Fear of Downturn in the Stock Market

Market operators and analysts have said the price rally in the Nigerian equities market is sustainable, writes Goddy Egene

This time last year, the Nigerian equities market was down by 1.2 per cent. But currently, the market is up about 19 per cent, the highest growth the market has ever witnessed within such a short period since the down turn of 2008.

The market rebounded in 2012 with a growth of 35.4 per cent, the third highest growth globally, while market operators/analysts had envisaged more recovery this year. But the rate of growth has been unprecedented.

By the end of January, the Nigerian market closed as the best in terms of returns globally as the Nigerian Stock Exchange (NSE) All-Share Index (ASI) returned 16. 3 per cent. Also, the market returned 63 per cent in United States dollar terms in the last 12 months even as more international fund managers and analysts remain bullish on the market.

Some stakeholders have raised the alarm over the spike in equities prices, wondering if another bubble is not being built. However, operators and analysts said there should not be any cause for alarm, explaining that the growth has legs to sustain it.

The NSE Reform Strategies

THISDAY checks showed that while attractive valuations and expectations for corporate actions for the year ended December 31, 2012, had been fueling the bull run, some of the market reform strategies introduced by the NSE had also boosted the current growth.

One of such developments is the market making that was introduced last September. Nine months to the introduction of market making, the ASI rose by 23 per cent. But five months after, the ASI has appreciated by 30 per cent.

Even then, analysts believed the market making had its correction mechanism as prices of the market making stocks were allowed to swing up or down maximum of 10 per cent.

Besides, the stocks in the market making baskets are still below 50 out of the over 200 stocks in the market.

International Acceptance

However, not only domestic analysts and fund managers are of the opinion that the Nigerian market deserves the growth it is witnessing now. International analysts also said the market rally was justified.

Speaking in Lagos recently, the Chief Executive Officer of Renaissance Capital, a unit of the Russian investment bank, Mr. John Hyman, said Nigerian equities market remained attractive to both local and institutional investors because of the returns potential.

According to him, the growth in the equities was also as a result of economic growth in the country.

"In Africa, the Nigerian equities market is the largest and most attractive market to us. We would say to any long-term investors: you should have some Nigerian shares in your portfolio," Hyman said.

Although emerging markets are always seen by investors as highly risky, Ms. Julie Dickson of Ashmore, a London-based specialist emerging markets investment management firm, said rally in the Nigeria and other African countries would be sustained by still-compelling dividend payments.

According to her, the dividend yield is about six per cent on average in Africa, compared with about three per cent in emerging markets.

Foreign fund manager also believe that African markets also offer some diversification away from the risk-on, risk-off forces that have dominated global markets.

Although frontier markets can be highly volatile, they largely move independently of events in the United States or Europe - an attractive characteristic for many fund managers, according to chief investment Strategist at BlackRock, Russ Koesterich.

Bull Drivers

Analysts at Financial Derivatives Company (FDC) Limited said the bull run in the market could be associated with renewed investor confidence and interest in the stock market.

"The trending down of bond yields and money market rates has reduced the appeal of fixed income securities to most investors. Also, unattractive returns witnessed in the western economies especially Europe has increased the rate of capital inflows into emerging market exchanges such as Nigeria's," they said.

To the President of the Association of Asset Custodians of Nigeria, Mr. Segun Sanni, the growth was normal considering the fact that many investors were chasing after few stocks.

"The Nigerian market is still not perfect because of the scarcity of viable investment alternatives. Investment funds, pension funds, foreign investors are chasing these instruments and it is not a big surprise to see the price appreciation. We will continue to see such trend until we introduce more stocks and other instruments or investment alternatives," he said.

The Managing Director of Partnership Investment Company Plc, Mr. Victor Ogienwonyi, said the macroeconomic fundamentals and expectation for companies results were factors attracting the bulls.

"The broad macroeconomic fundamentals are also very good. The major event to come is when companies release their results and declare dividends. Investors react to good results. We are gradually seeing the return of retail investors which will help sustain the rally at least to the end of the first quarter," he said.

Speaking in the same vein, Managing Director of Mega Equities Limited, Mr. Sam Onukwue, said investors were buying ahead of the earnings season where companies were expected to declare impressive results.

He added that the decline in yields on fixed income securities had also made the equities market more attractive.

He therefore, said there should not be any cause for alarm over the growth trajectory of the market.

Onukwue said: "First we are in the season of expectation of result of companies especially in banking sector. The current trend reflects investors' expectations of the results. I believe they have good reason to expect better results this year. First with the resolution of the banking crises and the window created by AMCON, banks have been able to clean up their books and are more careful in managing their risk assets today than was the case before the crises.

"Banks' non-performing loans are lower and cost of doing business is better managed today. The result of these and many other measures taken by banks and regulators will begin to manifest in real profit/growth in earnings. For the real sector most of the companies restructured and diversified their businesses in the last few yrs. The effect of this strategic positioning by the companies is reflected in the robust results they posted in second and third quarters thus fuelling high Investors expectation for the year end. Other macro-economic factors such as the decline in treasury bills rates also contribute to the trend."

Allaying Fears

Despite the reasons being attributed for the bull run, some stakeholders are still apprehensive, wondering how long the bulls remain in control of the market.

But analysts at FDC said to they believe the market will continue in its long-term growth track this year.

"Our growth forecast of a 25 per cent rise in the ASI remains on course to be achieved this year. We are however cautious about the current run. Already, we have seen profit-taking on several banking and consumer goods stocks that appreciated in the last three months," they said.

According to Sanni, he did not anticipate any big problem the forces driving the market today are different from the rally of 2007 and 2008.

"The consolation here is that the situation today is very different from the past where the turbulence was mostly fueled by wanton insider abuse and market manipulation by some operators. Today's trend is expected to even out smoother without the turbulence of the past. Investor sentiment is generally positive. Remember that many good stocks had been severally underpriced by the events of 2008 and 2009. Those are also taking their correction. I do not anticipate any big problem," he said.

Ogienwonyi believed the broad run of the market would be sustainable in the short run.

"Individual stocks which rise too far from the average will correct itself back to average. This rally has legs. The volume and value traded are a sign of investor confidence coming back. There will be occasional corrections but not to entire sectors or market," he said.

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