Two weeks into the new year and the Nigerian Stock Market is already up 2.5% year to date. Stocks got to a fly last week following a slew of corporate deals that got the market excited.

During the week, Ardova, Transcorp, Champions Breweries, etc. were all in the news for reported acquisitions that are already paving the way for what could be a very busy 2020 for the stock market.

As corporate deals dominated the headlines, penny stocks topped the gainers’ charts with stocks like Japaul, Mutual Benefit, Royal Exchange, etc. posting double-digit gains. In fact, the top ten gainers last week all returned over 30%.

Among the top ten stocks, last week include about 7 Insurance stocks which all gained 30% and above. None of these companies have published any corporate actions lately and neither have they published any results. Yet their share prices have gained significantly in just 10 days of trading.

Insurance Stocks on the fly

The insurance sector is currently the best performing in the country with the NSE Insurance Index already posting a YTD return of 28.63% in just two weeks.

• Out of the 23 stocks listed in the index, 14 have posted at least 9% gains and above while the top ten are up by over 25%.
• Apart from being the best performing index on the exchange, it is arguably the best asset class to invest in Nigeria now.
• At 28,63%, the index is already beating the inflation rate which topped 15% in December.
• Last year, Sunu Assurance, another insurance stock was the best performing stock in the country posting a return of 400% YTD. AIICO ended with a 57% pop and Lasaco 40%.

Fundamentals not the driver

• While most insurance stocks appeared undervalued for much of the last two years, the harsh business environment faced by most insurance last year firms could not have pushed valuations this high.
• For example, insurance claims for the nation’s top insurers, Custodian, NEM, Axa Mansard, AIICO, WAPIC, and Consolidated Insurance rose from N56.3 billion in the first 9 months of 2019 compared to over N78 billion in the first 9 months of 2020.
• Insurance claims as a percentage of Net Premium in the same period hit 72% in 2020 compared to 61% in the same period in 2019.
• Insurance companies make money from a combination of underwriting profits (net premiums net of claims) and investment income.

Recapitalization is seen driving insurance stocks

Nairametrics understands the driver is likely the recent recapitalization efforts that have dominated the sector since 2019. Insurance regulator NAICOM had given Insurance firms until December 2020 to recapitalize or risk their licenses being revoked.

• The recapitalization rules require life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion previously.
• In the same vein, general insurance companies are required to raise their minimum paid-up capital to N10.0 billion from N3 billion previously.
• The regulatory capital for composite insurance was raised to N18 billion from N5 billion previously while reinsurance businesses are now required to have a minimum capital of N20 billion from a previous N10 billion.

However, the ravaging covid-19 pandemic forced the regulator to move the deadline to September 20202 but insurance firms were required to meet half the recapitalization requirement by the end of December 2020.

Court order Suspends Recapitalization

As insurance firms battled to raise capital, some took the regulator to court and obtained a court order suspending the recapitalization requirement.

• According to reports, Justice C. J. Aneke of the Federal High Court issued an order suspending the recapitalization on the back of an ex parte application applied for by the Incorporated Trustees of the Pragmatic Shareholders’ Association of Nigeria.
• In late 2020 the House of Representatives also passed a resolution demanding a suspension of the recapitalization efforts.
• Nairametrics understands despite all these suspensions and postponements, Insurance firms have till June to at least meet 50% of the recapitalization goals.

Upshots: As we continue to watch this space, Nairametrics expects a flurry of public offers, acquisitions, divestments to dominate the insurance sector in 2021. As charter around potential deals dominates the rumour mills of the market, insurance stocks will increase in demand. As usual, investors are advised to pick choose wisely.

Nigerian stocks ended the previous week cumulatively on a bullish note.

The Nigerian All-Share Index and Market Capitalization appreciated by 2.63% to close the week at 41,176.14 and N21.530 trillion respectively.

Sixty (60) equities appreciated at price during the week, higher than fifty (50) equities in the previous week. Nineteen (19) equities depreciated in price, lower than twenty- one (21) equities in the previous week, while eighty-two (82) equities remained unchanged, lower than ninety (90) recorded in the previous week.

The uptrend was driven by price appreciation in medium capitalized stocks among which are; Japaul Gold & Ventures, Mutual Benefits, AXAMansard, Royal Exchange, Champion Breweries, all printing weekly gains of more than 30% amid strengthening fears that reveal the COVID-19 crisis seems to be getting out of hand in Nigeria’s key international markets including Western Europe and the United States.

What they are saying

Michael Nwakalor, a Macroeconomist at CardinalStone Research, in a note seen by Nairametrics, gave key vital insights on what might be in play at Nigerian Stock Market in the coming days.

• “This week, we expect market players to continue to position for imminent dividend announcements with the release of full-year results in view. The continued dovish stance by the MPC in their first meeting of the year may also provide a tailwind for equities in the later sessions of the week.”

On the foreign scene, global stocks pared early losses on Monday as data confirmed the second world’s biggest economy China had impressive factory output report helping to offset recent disappointing news seen in America, showing a plunge in retail sales.

In addition, Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, spoke on macros that will be very key for stock traders and investors in the coming week.

• “We open the week to a noisy route-step beat of US national guards ring-fencing Capitol Hill. It’s hardly a festive backdrop to set the stage for a risk rebound into earnings season, especially with the latest unsavoury macro developments hanging like a dark cloud over markets.
• “Still, US stocks remain close to all-time high levels. The fiscal and monetary policy mix remains exceptionally supportive and dips at this stage are getting consumed. The Fed will continue to be highly accommodating even if they taper in QE in 2021 as they are unlikely to hike Fed Funds until 2022 or beyond.
• “The big questions remain as to what factors will take us higher over the short term in the face of the viral variants forcing politicians to lock down parts of the economy.”

Bottom line

With the COVID-19 pandemic under control in China, factories and export-oriented companies have been operating much better than most other countries, allowing China to meet global demand. The ongoing lockdown measures in play in Europe and the US are likely to continue to spur demand for Chinese goods in the coming months.

The Nigerian Stock Exchange Industrial Index appreciated by 2.84% during the week to close at 57.03 index points higher, as shares of Dangote Cement, Lafarge, WAPCO dragged the index to close the second week of 2021 higher, amid renewed buying interest by local investors.

Checks by Nairametrics revealed that the NSE Industrial index, as of close of trading activities on Friday, stood at 2,062.29 index points from 2,005.26 index points at the open of trade on Monday 11th January 2021.

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 Chemical Allied Products.
• Consequently, the performance of the companies was relatively balanced as the index closed on a positive note with 5 gainers relative to 5 losers. MEYER (+10.00%) led the gainer’s chart for the week, while CUTIX (-8.75%) was the top loser.

Top Gainers

MEYER up 10.00% to close at N0.55

PORTPAINT up 9.84% to close N2.68

WAPCO up 6.73% to close at N23.80

CAP up 3.25% to close at N20.65

DANGCEM up 2.31% to close at N230.20

Top Losers

CUTIX down 8.75% to close at N2.19

NOTORE down 4.00% to close at N60.00

BETAGLAS down 2.17% to close at N54.20

BERGER down 1.36% to close at N7.25

BUA CEMENT down 1.25% to close at N79.00