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Home Opinions Blurb

Analysis: Why the stock market is rallying in November

Blurb Team @Nairametrics by Blurb Team @Nairametrics
November 17, 2019
in Blurb, Spotlight
Blue Chip stocks that defied COVID-19
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What an eventful week it was for the Nigerian Stock Market. At the close of trading on Friday, November 15th, 2019, the stock market All Share Index closed with a 2% gain marking one of the highest weekly gains this quarter. 

Investors piled on into stocks like a kid in a candy store driving up market valuations for companies that have for months been shy of the true reflection of their worth. Investors still on the sidelines wondering if this is a dead cat bounce (a metaphor for a temporary resurgence of stocks) may have a rethink if the rally is to persist into the week.

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Most analysts report read by Nairametrics suggest the recent rally is a combination of several factors which if sustained could prolong the rally. What you don’t want to be as an investor is finding yourself missing out on a stock market rally that could perhaps be the only one for another six months.  

What is driving this rally? A combination of regulatory actions, cheap valuation, and asset reallocation have been identified as the key driver.  

  • Last month, the Central Bank issued a circular barring any investor from participating in the Open Market Operations (OMO) except for Deposit Money Banks and Foreign Investors.  
  • Analysts suggest that action may have freed up about N3.5 trillion in cash from local corporates and institutions that have been barred from accessing the OMO market.  
  • Where will all that cash now go to? Your guess is as good as mine. 
  • There is also another circular issued by the CBN which instructed banks to maintain a loan to deposit ratio of 60% with a skew towards SMEs. 
  • By December, the LDR will be increased to 65% exerting more pressure on banks to start lending. This potentially leaves lot of cash on the table for investors.
  • Having nowhere else to rush to, it appears investors are now looking towards stocks as the next available source of Alpha. 
  • Nigerian Stocks are also relatively cheap with an average Price to Earnings ratio of about 8%. In fact, some commercial banks have earnings yield north of 35%. 

Who is investing? NSE data does not reveal (well, for now) what or where the source of inflow into the stock market is from. Investing in the stock market is typically between Foreign Portfolio Investors, Institutional Investors, and Retail investors.  

Data from the Stock Exchange for September, suggest Retail Investor participation in the stock market averages about N24 billion compared to N32 billion for local institutional investors and N70 billion for foreign investors. Thus, how sustainable this rally could be will depend on who is currently driving volumes.  

Dead cat bounce? This is the biggest worry for any circumspect retail investor still sitting on the sidelines. Will this rally be sustained or is it a bull trap?

  • If the current rally is driven by retail investors taking positions in anticipation of a major portfolio inflow from institutional investors then what happens in the next few days will matter greatly.
  • If investors are under pressure for yields then we could see some funds flow into the stock exchange.
  • Investors are still very wary about Buharinomics and still envisage a lot of headwinds in the economy. Government revenues are no better than they were three months ago and the fallouts of the border closure on the economy are still being comprehended.
  • Foreign investors are also not buoyed with the relatively cheap asset valuation and from all indications are happy to continue to enjoy a 15% yield on OMO. And there is still the matter of devaluation which they still expect to occur.
  • There is also the FGN Bond auction which is expected to be sold on November 20. The Government expects to raise about N150 billion at rates between 12.7% and 14.8%.

But, be smart: Stock market prices are very cheap particularly for some of the bluechip stocks. Despite the poor stock market run, companies are posting profitability growth with relatively good returns on equity. Purchasing stocks that have an earnings yield of 25% and dividend yield about 8% is at least a better return than one can get in treasury bills. Finding these stocks is where the real work is.


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Tags: Bottom LineNigerian Stocksstock market rally
Blurb Team @Nairametrics

Blurb Team @Nairametrics

The "Blurb Team" is the official conveyer of the opinions of the Nairametrics Research & Analysis Board on matters of financial reports, macroeconomic data, and economic policies.

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