Reasons why the stock market is on a bull run

Nairametrics| In case you have not noticed, the stock market is on a bull run. The all share index has gained for three consecutive business days and 5 out of 6. As at yesterday, we had no new stock trading at their year lows but rather had some stocks trading at their new highs. There is perhaps a reason for this new bull run can explain.

New Pension Rules

The former Director General of the National Pension Commission, Mrs. Chinelo Anohu-Amazu was sacked two weeks back by the Buhari Administration under controversial circumstances. However, before she left, she had approved a new guideline that changes the rules on investments in equities by the Pension Fund Administrators. Under the new rule, pension funds cannot invest as much as 30% of their global portfolios in ordinary shares and GDR of quoted companies as against 25% in the prior regulation. This suggest more funds will likely flow into the stock market as pension funds scramble to take significant stakes in undervalued stocks.

New FX Policy

The CBN in April 21, issued a new FX policy for investors and importers that signified a massive shift in the way forex will be priced. Departing from the fixed exchange rate regime associated with other windows introduced by the CBN, the exchange rate in FX window for investors and importers will be determined by the market. This was expected to entice foreign investors who showed apathy towards a policy of fixed exchange rate and capital controls. The new rule has been in place for about two weeks now and has seen the exchange rate between the naira and the dollar average N380.

Improvement in headline indices

Even though Nigeria is still technically in a recession, some of the headline macroeconomic indices suggest things are improving faster than expected. For example, the inflation rate has tapered down in the last two months following a high of about 18.7%. Most analysts (foreign and local) also expect improved GDP numbers on the back of stable oil production and oil prices of about $50. Corporate profits have also started improving suggesting that the hemorrhaging of cash may have reduced. The latest Purchasing Managers Index published by the CBN of 51.1 is also considered sign of improvement in the overall economy as businesses consider increasing inventory.

Passage of the 2017 budget

Even though the 2017 budget is still not passed by the National Assembly, there are strong indications that the presidency and the legislative arm of the government have little disagreements on key portions of the budget. The budget is expected to be passed this may providing the needed stimulus the economy needs to blow on full steam. With the recent success of the Eurobond as well as other debt offering by the FG, the revenue shortfall experienced in 2016, is likely to be repeated this year.

Market play

We also understand most quoted companies are looking at raising significant capital this year as they strive to shore up their balance sheets. This is a logical step after a country experiences a recession. However, with share prices down and mostly undervalued, we believe most market makers will try to stimulate a rally on their share prices, by creating demand and hoping that the demand remains sustained enough ahead of their announcements. More mergers and acquisitions are also expected this year especially for companies that have lost the will or attraction of new capital. We expect, fund raising or consolidation in the consumer goods, financial services and oil and gas sectors sometime this year

We believe the combination of these factors is translating into a bull run that may gather storm in the coming weeks or fizzle out depending on how quickly foreign investors start to return. Reports suggest some of them are still on the sidelines as they await reviews of the new FX policy and the passage of the 2017 budget.