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The Nigerian stock market closed the month of October with aplomb, posting the largest monthly gains in nearly two years. The Nigerian All Share index closed the point with 35,034 points closing with a monthly gain of 14.72%.
Inventories have risen 30.48% year to date and on track to reverse the losses of the past two years. Stocks are still below the 2017 high of 38.243 points, which suggests there may be more room for growth.
Main engine for actions
The equity market has attracted significant demand from institutional and retail investors seeking higher returns on their investments. With interest rates on alternative investments such as fixed income, hundreds of billions of cash from local investors have flowed into the stock market driving the bulls crazy.
- The central bank’s policy of lowering interest rates has been positive for the stock market, as yield-seeking investors turn to the stock market. The Covid-19 blockade caused shares to plummet earlier this year down 18.75% in March alone as investors dumped the shares in droves.
- This sent the double-digit dividend yield, making it just a matter of time before investors.
- Nigerian stocks have also benefited from the positive sentiments surrounding rising oil prices and the slew of announcements of a vaccine found for Covid-19.
Better stocks
During the month, Livestock Feeds was the highest with a return of 132% since the beginning of the year, followed by International Breweries with a pop of 84%. Airtel Africa joined the top 10 gainers list during the month with a 55% gain as investors rewarded telecom companies for its impressive results.
On an annual basis, Sunu Assurance tops the ranking of gainers with a 400% gain, followed by BUA cement with 204%. Livestock Feeds, Airtel and United Capital make up the rest of the top 5 stocks this year earning 160%, 97% and 88% respectively.
United Capital and BUA Cement are included in the Nairametrics Stock Select portfolio.
Can it be sustained?
Investors remain wary of the stock market with the experiences of the past two years still fresh in their memories. However, there are factors that could lead the market into a bearish run.
Interest rates – When CBN chooses to raise interest rates on Treasury Bills or OMO Bonds, know it’s time to get out. I don’t need to explain it further.
Zombie stocks on the rise – These are stocks with little to zero fundamentals that earn double digits. We saw a few of them last week and it was pretty scary. But as a SSN subscriber, we will never recommend a zombie stock, so you won’t be caught dozing off.
Political instability – Nigerian stocks withstood EndSars protest after a few days of panicked sales. However, with tensions still in the air, further political skirmishes could severely depress the market. Nigerian politicians have so far demonstrated an impressive array of domestic crisis management skills, so I bet they can handle it. However, with the economy in trouble, this remains a major concern for me.
Bombing – I shuddered during the week when I heard there were meetings taking place in the Niger Delta to discuss the northern states mining and selling gold. The last thing we need now is another bombardment by militants from the Niger Delta. If that happens, expect a massive sell-off.
Oil prices – Nigerian equities remain perfectly correlated with oil prices. It is a rule that has remained for decades and which still matters. While we have seen oil prices drop below $ 40 in recent weeks, it has found a way to surpass it. The recent spate of covid-19 cases globally remains a concern, but this is largely mitigated by the discovery of a possible Covid-19 vaccine.
Foreign Investors – During the week, traders on the MSCI Frontier Markets Index decided not to intervene on Nigeria. This means that despite all the challenges we have with forex; they still see the Nigerian stock market as a destination for foreign portfolio investments. I don’t expect foreign investors to continue investing in Nigeria due to the challenges with capital control, but our market is still attractive. In fact, I’ve heard that stocks like Nestlé, Nigeria Breweries, International Breweries are attracting significant overseas portfolio investment.
Where does this lead?
We are now on the verge of a new market order. If interest rates stay that low, we will continue to see an equity market that will be robust and resilient. Our bold theory is that we may never see another major stock market crash if we sustain this bull run for another full quarter.
- Investors will demand greater accountability from company management, while regulators will enforce transparency.
- Companies will regularly publish interim and annual reports and strengthen their investor relations business.
- This will boost confidence in the stock market by enabling sustained investment. At some point soon, we will see the return of mega IPOs, public offerings and just problems.
- Retail investors will flock to the market but will be better informed on what to buy and what not to buy.
- This may all sound overly optimistic, but let’s remember that the US stock market has been on a bull run since 2008.
Indeed, the global stock market will remain supported on the positive side if Western governments continue with their quantitative easing programs pumping cheap money into the economy.
