…despite COVID-19 shocks to world economy in 2020

Foreign investors ploughed back profits to the market—Analysts

Inspite of the vagaries and volatility occasioned by the deadly COVID-19 pandemic, which debilitated and destabilised the economy in countries across the globe, Nigeria emerged as the best performing stock exchange in the world in 2020.

A detailed analysis revealed that the major reasons for the sudden bullish trend at the stock market during the period was the movement of investors from the low interest environment of the fixed income market.

Nigeria’s Federal Government had deliberately ‘decreed’ low yield returns for its Treasury Bills and Bonds to ‘dislodge’ investors from the safe haven of fixed income market, while the sustained Central Bank of Nigeria’s position consequently spurred a rally in the equities market.

The low-yield interest rate environment ignited an appreciation in stocks’ valuation, leading to many stocks recording price gains compared to their pre-rally levels. This includes stocks outside the Bellwether group such as insurance, which used to dominate the equities.

“The stock market jump in 2020 was the result of the ‘frustration’ of foreign and other investors who could not access forex to repatriate their profit or buy raw materials. They had no better choice than to reinvest in the stock market,” said Uche Uwaleke, a professor of the Capital Market at the Nasarawa State University.

Market Pundits and other financial analysts also said, “Despite the depth and suddenness of the Covid-19 crisis, private equity markets have done well in 2020. With a combined market capitalisation of N6.27trillion (N3.74trillion and N2.53trillion), or 31 per cent of total market capitalisation of N20.23trillion as of March 12, 2020, the companies would naturally impact the stock market. For instance, Dangote Cement buy-back (deal of 85.2million shares) executed on the NSE in December 2020, aimed to repurchase 10 percent of the company’s 17.04 billion issued shares led to a 9.98 per cent rise in its share price to N230.4. The shares, which hit bottom-line in April, rose to an almost two-year high on the news of the share buyback.”

Stakeholders see a bust in the bullish stock market in 2021, as analysts at Cordros Securities said Bull Run in the equities market would extend into 2021 financial year, saying a mix of elevated liquidity, low interest rates, attractive dividend yields, and earnings recovery favour an extension of the equity bull market.

According to them, “The performance in the fixed income market will be a tale of two halves, as they expect yields to remain in the low single-digit territory through first half (H1) of 2021 with a moderate uptrend to account for reduced market participation as investors seek yields in other asset classes.

“However, in the latter part of the year, we believe that a combination of weak market participation, revision of monetary policy to a tightening cycle, widening fiscal deficit, and fragile macroeconomic environment will lead to an increase in yields over 2021.

“Similar to the fixed income market, we also expect it to be a tale of two halves for Nigerian equities in 2021, with the market delivering further upside in the first half of 2021 before retracing slightly in the second half on an expected reversal in fixed income yields. The sources of risks remain plenty, the macro story remains uninspiring, and valuations are elevated.”

Speaking in the same vein, an Economy Analyst, Mr. Mathew Udechukwu, said, “Market direction ahead will depend on how much further we have to go in terms of the peak in economic activity and how much of the temporary bounce in growth and inflation will become structural. Currently, there is growing evidence that companies are passing on price pressures and that consumers are continuing to buy as the economy begins to pick up. In the end, structural is just something temporary that has lasted. Fear of inflation can become inflation: if the rush to buy and the move to increase prices continues.”

Udechukwu said a controlled increase in bond yields as a consequence of economic growth was good, noting that if inflation gets out of control and rates rise while growth falters, there would be nasty consequences for most indebted areas and it would affect market sentiment, overall.

“The post-COVID world not only could feature higher inflation, but it could also see further long-term trends reinforced. The digitalisation of economic activities and trade, as well as the strategic importance of supply chains, clearly cannot be denied,” he said.

He noted that the COVID crisis had also rekindled the willingness of governments and central banks to steer economies and financial markets by means of aggressive policies, adding that such efforts were currently ongoing and could help to maintain a low interest rate environment.

“Lastly, the main lesson of this crisis is undoubtedly a greater global awareness of the fragility of our environment and way of life, as well as a growing recognition of environmental, social and governance issues,” Udechukwu said.

However, life has returned to the fixed income market, which was deserted by investors over three years ago when they trooped to the equity market, where yields offered better prospects.

The fixed income market had been a desolate place because of government’s deliberate, but misplaced, decision to starve the window of yields. But it urged investors to turn to the equity market to drive the real sector and boost production, while it looked for foreign loans to fund its budget and building of infrastructure.

As the Nigerian stock market remains attractive in terms of dividend yield and market valuation ratios, with the All Share Index outperforming peer exchanges in Africa, NSE Chief Executive Officer, Mr. Oscar Onyema, said the stock market performance was supported by recovering oil prices, resumption of economic activities and attractive valuations.

Onyema said, “We have seen the NSE All-Share-Index rally from -20.6 per cent in March to -6.1 per cent return year-to-Date. This is particularly noteworthy when compared to other leading African Exchanges, including the JSE/FTSE ASI (-13.1 per cent); Nairobi ASI (-15.6 per cent); and BRVM Composite (-17.5 per cent); EGX 30 ( -27.6 per cent). We have also experienced increased activity from domestic investors, who currently represent 59 per cent of equity value traded for the first time in ten years, as well as from retail participants, who are taking advantage of low valuations and high dividends.”


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