The Nigerian Stock Exchange Industrial Index at the close of trading activities for the second month of 2021, closed on a bearish note, with the index depreciating by 8.8%, to close at 1898.2 index points for the month.

A preview of the performance of the index revealed that it shed a total of 183.17 index points – the highest since November 2018 (-190.58 index points).

This steep decline in the index was occasioned by the sell-off by wary investors in the shares of companies in the industrial sector, with the shares of Lafarge (WAPCO), BUA, and Dangote Cement being one of the shares impacted on the exchange.

The sell-off however was triggered by profit-taking activities across the market spectrum.

However, other factors that contributed to this sell-off may include rising yields in the money market spooked by CBN’s move to increase yields for OMO bills, as well as expectations of further devaluation of Naira.

What you should know

• The NSE Industrial Index was designed to provide an investable benchmark to capture the performance of the Industrial Sector. It comprises the most capitalized and liquid companies in the industrial sector and is based on the market capitalization methodology.
• The index monitors the performance of ten industrial companies on the Nigerian Stock Exchange which includes Dangote, BUA, and Lafarge Cement.
• The overall performance of the companies was bearish in February as the index closed on a negative note with eight losers.
• WAPCO (-23%) led the loser’s chart for the month, followed by Berger (-9.94%) and Betaglas (-9.75%).

Top losers

• WAPCO down by 23.00% to close at N23.10
• BERGER down by 9.94% to close at N7.25
• BETAGLAS down by 9.75% to close at N50.00
• BUACEMENT down by 8.86% to close at N72
• PORTPAINT down by 7.14% to close at N3.25
• DANGCEM down by 6.78% to close at N220

The Nigerian Stock Exchange ended February with a 6.16% loss ending 7 months winning streak that started in July 2020.

Year-to-date, the Nigerian stock exchange also swung to a loss of -1.17% after closing the month of January with a 5.32% gain. Out of the 166 stocks tracked by Nairametrics 53 stocks posted losses while 35 stocks gained, the rest were flat.

In total, investors lost a whopping N1.1 trillion during the month wiping off all the gains made in January. The last time stocks lost over a trillion naira was in March 2020 when stocks plummeted by about N2.5 trillion due to the global pandemic that had just broken. Before February, stocks have lost N1 trillion and above only 4 times in the last 5 years.

The selloffs also ensued despite the National Bureau of Statistics report that Nigeria had exited a recession beating consensus analyst expectation of a U -shaped recovery.

READ: Bloody February: Dangote, BUA and Lafarge shares lose N622 billion in February

READ: Exchange rate gains at NAFEX as external reserves loses almost $1 billion in less than a month

Why the sell-off?

The sell pressure on Nigerian stocks in the month of February is attributed to a change in key economic drivers that have underpinned the success of stocks in recent months.

• Overvalued stocks – As stocks hit an all-time high of N22 trillion in market capitalization, investors found it harder to find value in equities. Nigeria boasts of less than 200 stocks on its flagship bourse out of which about 60 have enough liquidity to absorb more capital. For most investors, the key driver for investing in stocks was the dividend yield. However, as market value spiked, the prospects for higher dividend yields fell making investments in equities less attractive.
• Profit-taking – As investors assigned overvalued status to Nigerian stocks, many saw this as an opportunity for profit-taking. For example, the NSE 30 Index swung from a positive return of 4.93% in January to a loss of 7.41% in February. Pension funds also sold off stocks with their index falling to a loss of 7.68% after closing January with a 7.49% pop. The insurance sector which led the gainers’ chart earlier on in the year went from a gain of 29.77% to a loss of 17.82%
• Earnings season – The anticipation of how investors might also react to 2020 FY results also played a role in the selloffs that occurred in February. Investors expected a fall in profits for most listed companies. To avoid being in a value trap they sell off and hope to return once the outlook becomes clearer.
• Rise in interest rates – Lower interest rates have been the major driver of an upsurge in the market value of stocks since last year. The central bank sent clear signals during the months that it was in the mood to increase yields of its OMO and Treasury Bills thus competing directly with dividend yields (which we touched on above). The higher the yield on risk-free investments the less attractive investing in stocks become.
• Gloomy economic outlook – Lastly, insecurity, social unrest and an ailing economy are also weighing down on investors. Investors are also worried about the economic growth of the country and the ability of the government to continue to operate in a bankrupt state. Nigeria has seen its fiscal deficits explode in recent years. Some of the deficits are funded by an estimated N10 trillion in CBN’s Ways and Means lending.