Nigerian Stocks gained for the 5th straight day and the 9th day out of 10 days of trading crossing the N9 trillion market capitalization mark for the first time in since 11th November 2016. The market has now basically wiped out the losses it incurred in the November bloodbath.
As we enjoy this bull ride, it is pertinent to take a cursory look at what might be stimulating this rally and if it will last the mile. I believe the current rally is due to the 4 reasons enumerated below. But before I take you through them, I’ll like to rule out a few things. If you think this rally is based on some economic fundamentals, sorry it is not. The Nigerian stock market hardly reacts to fundamentals of companies. Investors will not buy shares because they simply believe that a positive economic outlook suddenly means companies will post increased profits. That’s not how this market react. It doesn’t really care about those numbers.
Now, time to opine on why stocks are indeed rallying.
2017 Budget – The Federal Government announced its 2017 Budget on Wednesday with spending set to hit a record N7.3 trillion for 2017. If the budgeted is fully implemented, it will likely jump-start the economy as renewed spending focussed on targeted sectors could help create jobs, boost earnings and possibly drag Nigeria out of a recession. The key here are foreign investors and a change in their appetite. They have mostly fled Nigeria but are willing to return if the 2017 budget continues to get the type of positive review we are seeing.
A spate of favourable ratings report – Just recently, ratings agency Fitch and Moody’s released separate report about Nigeria which may have suggested that the outlook for the economy is looking good. Moody’s for example, predicted a likely return of foreign investors into the Nigerian economy. “While improved foreign investor sentiment should support the rebalancing of the economy over the medium term, with the return of portfolio investors improving dollar liquidity in the country, the continued existence of a parallel, unofficial foreign exchange market is likely to act as a strong deterrent over the near term.” Moody opines.
Fitch on the other hand indicated support for a planned “Amcon 2.0” which they believe will help clear some of the non-performing loans of commercial banks. According to Fitch, “Setting up an asset management company (AMCON2) to acquire NPLs would in our view be a more significant and credit-positive measure. If successful, and depending on transfer pricing agreed, it could result in real improvement in the banking sector’s asset quality. Sectors experiencing difficulties include oil and gas, utilities, manufacturing and trading.”
Again, these are all positive information for foreign investors whom the local investors bank on for a normalized return to growth in the capital market.
Rise in oil prices – Last week OPEC agreed to cut crude oil production by over a million barrels a day sending crude oil prices to well above $50. Another sweetener was added last week when non OPEC countries led by Russia also agreed to join in the crude oil cut backs. This very well means that oil prices could stay above $50 throughout 2017 compared to the average of $40 observed in 2016. Also, the government is bullish on hitting 2.2mbpd in crude oil production which when combined with the rise in oil prices could significantly boost government revenues. Just as we mentioned earlier, this is music to the ears of local investors who believe that all the pieces required to help foreign investors return to Nigeria are now falling into place.
Xmas rally- As the chart below depicts, Nigerian stocks typically close December on a high. For seven straight years now stocks have closed December on a high. This is why it is often called Sancta rally or Xmas rally. Reason for this is thought to be because asset and portfolio managers who re-allocate their portfolios and sell-off under performing assets for tax reasons. So to boost valuations, Portfolio Managers and those who index the market, purchase shares from Blue Chip stocks in December.
I believe the sancta rally more than any of the other reasons play a major role in why the bulls are back. I also believe, stocks could continue to post gains every week till the end of this year. But come January, the bears takeover!