Nigeria’s Equity Market Outlook: When Local Sentiments Counter Foreign Apathy
When Something is Wrong with Nigeria’s Equity Market and GDP Alignment
Nigeria’s equity market is not a fan of its national output or GDP, and it does not give two worn kobo about the country’s slow growth. Indeed, the country’s equity market values have dashed ahead of economic output growth (2.4% in H1 2023), sticking out a tongue at the economy’s slow speed. According to one economist, ‘the economy may have its say, but equity market investors are having their way; they are voting with their cash!’. The equity binge follows a global trend where asset values appear to be consistently outpacing trade values; in other words, countries that want to raise their living standards must find assets to value.
For Nigeria, analysts have noted that in the first half of the year (H1 2023), equity market performance and broad economic indicators seem to show only a mild correlation. Observers note that economic growth lagged market performance. On average, GDP grew 2.4% in H1, but the NGX benchmark All-Share Index (ASI) reported a double-digit growth of 18.93 % over the same period. The same trend was seen across sectors where sectoral GDP growth stalled and occasionally dipped, but the same sector posted over 50% growth in the equities market, save the industrial sector, which witnessed a growth meltdown. Analysts reckon that the recent pro-market reforms of the government inspired investors’ sentiment towards a rally, but the immediate reform pains have hurt gross national productivity and created household distress, which has affected consumer spending and corporate purchasing managers’ outlook.
The lag in GDP growth vis-à-vis the surge in market performance raises concerns about the market reflecting the macroeconomic fundamentals and the credibility of broad economy statistics as some analysts believe GDP data deviate from market reality and policy changes in recent times (see chart 1 below).
Chart 1:
Driving Equity Take-Off
The key drivers of the growth of the domestic Nigerian bourse have been the steady growth of the domestic money supply, which has lubricated economic spending post-COVID-19 (the money supply, M2, grew 34.4% in July 2023). The money supply tap has not turned off or back since the heart of the COVID-19 era; the monetary authority continued to accommodate fiscal spending overruns through the Central Bank of Nigeria’s Ways and Means (W&M) window up until 2023, when it securitized the outstanding N22.7trn by converting it into a long-dated (40 years) bond at a coupon rate of 9% per annum. High extra-budgetary expenditure and rising interest rates combined to attract investors to federal bonds and bills but also. saw investors take advantage of the usual growth in banking sector earnings when interest rates rise. Banks listed on the NGX have seen major price increases in the last twelve months. For example, a lender like GT Holdings has seen its price rise from N16.85 in October 2022 to N34.50 on September 28, 2023. Proshare analysts note that the banking group has headroom for further hidden value opportunities with its earnings per share (EPS) at N7.80 (as against N1.18 in Q2 2022). Shareholders’ one-year return of 93.8% trounces the average one-year banking industry return of 73.3% (both returns exceeding domestic inflation, thereby hedging inflation risk). The broad NGX one-year return at 65.9% has shown market resilience to pounding inflation, explaining sustained investor equity market interest. GTCO’s market volatility lags the industry, suggesting a lower risk per return on the bank’s stock. A few other banks fall into the same category (see illustration 1 below).
Illustration 1:
A few non-banking stocks have shown resilience against inflation and provided investors with a backstop to falling real asset values as cash loses its brilliance in a high inflationary environment. Clever inflation hedges have carefully picked through the market nuggets and held their own against persisting economic headwinds, such as a decline in the country’s foreign exchange rate, a sticky rise in domestic interest rates, and stubborn persistence in the climb of headline inflation.
Savvy domestic investors have kept faith in local equities as foreign investors stay on the sidelines until they see an improvement in political and economic stability. President Tinubu’s troubles with power legitimacy as opposition leaders take him to local and international courts to invalidate his presidential mandate creates uncertainty about his tenor and the longer-term orientation of the government. A new government could be less attracted to strong market-oriented policies. A resolution of the saga would establish greater foreign investor confidence and probably result in a larger inflow of foreign portfolio investment (PFI).
In the meantime, Proshare analysts are not enamoured by the prospect of an increase in foreign portfolio investors, and they have argued that the market needs a greater presence of the government on the local bourse through the listing of public assets on the equity exchange. The analysts point to structures such as the National Stadium Surulere, Lagos, the National Arts Theatre, Surulere, Lagos and several other federally owned assets across the country being packaged for listing on the NGX. As things stand today, the federal and state governments have no entity listed for equity trading. The meaning is that the market value of state assets is not determinable, and these assets cannot be used to collateralize loans that could be used to build enduring public infrastructure. Large tracts of land under the Nigerian Police, Army, Navy, Airforce, and Customs could be ‘financialized’ to improve fiscal liquidity and mobilise value-creating capital. The options available to the government to improve the budget balance are not rocket science; it is common sense (see chart 2 below).
Chart 2:
Nigerian Macroeconomy, Policy Reforms, and NGX
The new administration has embarked on vital reforms aimed at rectifying macroeconomic imbalances. This unique moment presents an opportunity to positively impact millions of Nigerians’ lives while laying a strong foundation for sustainable, inclusive growth. Notably, removing the petrol subsidy, a contentious and costly policy draining the country’s revenue, and FX management reforms are essential steps to rebuild fiscal capacity and restore macroeconomic stability. Seizing this opportunity opens the door to additional necessary policy reforms. While removing the petrol subsidy has resulted in a significant rise in petrol prices, contributing to inflation, poverty, and job losses, it has also created fiscal room for the government to invest in human capital development and alleviate its debt burden. Projections indicate potential fiscal savings of approximately N2trn in 2023, equivalent to 0.9% of GDP, which is anticipated to grow to over N11trn by the end of 2025.
According to the World Bank, Nigeria’s economy is projected to grow by an average of 2.9% per year between 2023 and 2025, slightly above the estimated population growth rate of 2.4%. Services, trade, and manufacturing will likely drive growth. In Q2 2023, Nigeria’s Gross Domestic Product (GDP) grew by 2.51% (year-on-year) in real terms, lower than the 3.54% recorded in Q2 2022, attributed to the challenging economic conditions. The new government has recognised the need to chart a new course and has already started on critical reforms, such as harmonising the exchange rate, which had earlier reduced the gap between the official and parallel market rates (an unfortunate reversal has since set in). It has also increased the inflow of foreign capital and earlier raised investors’ confidence. The impact of these policies on the NGX in Q4 2023 is likely to be progressive as investors respond to the policy changes. The NGX All-Share Index (ASI) gained 18.9% in H1 2023, rising to its highest level in 15 years. The market capitalisation also rose by N5.3trn in H1 20232. Analysts have optimism that the bullish sentiment will be sustained in the long run, as the policy reforms will improve the performance and profitability of listed companies (see illustration 2 below).
Illustration 2::
Financialisation: Long-term Fix to Nagging FX Shortages
Nigeria’s persistent FX illiquidity due to underperforming oil production and non-oil export calls for an optimal approach to salvage the gloomy outlook. Analysts have called for the financialisation of the countries’ assets, as seen in prominent economies like Saudi Arabia, India, Egypt, and others, to attract investment inflows and boost FX liquidity. Nigeria is known to have substantial idle assets that can be tapped by establishing market value through public listings; then, equity stakes can be auctioned to investors. There is a possibility of earning in dollars by initial equity sales to some foreign investors. For instance, Saudi Aramco, owned by Saudi Arabia, is listed on the Saudi Stock Exchange (Tadawul), attracting foreign investment, while the government remains the dominant stakeholder and earns huge dividend annually.
To activate the financialisation, there is a need for proper governance of the National Assets Register (NAR) in terms of compilation and subsequent sequencing for initial public offering (IPO). Analysts believe the country’s situation is far beyond seeking quick fixes such as loans, which worsens debt levels; rather, a more sustainable approach is to ensure continuous FX inflow and entice foreign investment. Our assessment of previous interventions scores low and may remain so until we give productivity a show. One leg to boosting productivity is to increase the efficiency of our national assets through listing.
Understanding the Verticals for Capital Market Growth
Nigerian equity market investors have been unfazed by economic uncertainty, political fragility, and heightened business risks as they lay far deeper roots in the local bourse, with market returns spiralling from 14.8% in September 2022 to 29.65% year-to-date (YTD) by the end of September 2023. With a new market-friendly President in power, despite the haze of controversy around his election, local investors have kept to their long or buy decisions with three sectors in the spotlight: banking and finance, fast-moving consumer goods (FMCGs) and telecoms. The rise in the market valuation of companies listed in these sectors of the Nigerian Exchange Limited’s (NGX’s) premium and main boards has given nominal yields an inflation-adjusted return superior to that of many emerging markets.
For example, YTD, the NGX All Shares Index (ASI) has posted a nominal return of 29.65% compared to the Hong Kong Hang Seng Index of -12.17%, Argentina’s SP/MERVAL Index return of 187.73%, and the Johannesburg Stock Exchange (JSE) Index return of -1.38%. Considering Nigeria’s recent August 2023 headline inflation of 25.80%, investors with a stock basket reflecting the relative distribution of equities on the NGX should expect to be at least 3.85% ahead of local inflation. However, with the average annual inflation rate likely to settle at 21% in 2023, equity market investors with broad portfolios skewed towards banks, telcos, and FMCGs could see their portfolio returns ahead of inflation by as much as 7.5% (easily amongst top ranking global inflation-adjusted investment rewards for 2023).
The NGX has seen investors pivot towards the equity market by moving out of their previous fixed-income market (bonds and bills) comfort zones. Institutional investors have revised their portfolios to reduce their heavy bias towards government instruments. Pension fund managers have also pulled back from the risky commercial paper market to add more equity to their asset baskets as they attempt to discover the optimal balance between market risk and reward (see illustration 3 below).
Illustration 3:
