The Nigerian stock market closed the month of October with aplomb posting the biggest monthly gains in almost two years. The Nigerian All Share Index ended the point with 35,034 points closing with a month to date gains of 14.72%.
Stocks are up 30.48% year to date and on track to reverse the losses of the last two years. Stocks are still off the 2017 high of 38, 243 points suggesting that there could be more room for growth.
Major Driver for Stocks
The stock market has attracted significant demand from institutional and retail investors seeking higher returns on their investments. With interest rates on alternative investments such as fixed income, hundreds of billions of local investor cash flowed into the stock market sending the bulls raging.
- The central bank’s policy on lowering interest rates has been positive for the stock market as investors scrambling for yield turn to the stock market. The Covid-19 lockdown sent stocks crashing earlier in the year falling by 18.75% in March alone as investors dumped stocks in droves.
- This sent dividend yield into double digits only making it a matter of time before investors.
- Nigerian stocks have also benefited from the positive sentiments surrounding the rise in oil prices even and the slew of announcements of a vaccine being found for Covid-19.
During the month, Livestock Feeds gained the highest with a 132% returns month to date followed by International Breweries with an 84% pop. Airtel Africa joined the top 10 gainers list during the month with a 55% gain as investors rewarded the telco for its impressive results.
On a year to date basis, Sunu Assurance topped the gainers’ chart with a 400% gain followed by BUA cement with 204%. Livestock Feeds, Airtel, and United Capital makes up the rest of the top 5 stocks this year gaining 160%, 97%, and 88% respectively.
United Capital and BUA Cement are included in Nairametrics Stock Select Portfolio.
Can this be sustained?
Investors remain wary of the stock market with the experiences of the last two years still fresh in memories. However, there are factors that could tip the market towards a bearish run.
Interest rates – When the CBN chooses to raise interest rates on treasury bills or OMO bills just know it is time to exit. I need not explain this further.
Zombie Stocks gaining – These are stocks with little to zero fundamentals gaining by double digits. We saw some of these last week and it was quite disturbing. But as an SSN subscriber, we will never recommend a Zombie stock so you cannot be caught napping.
Political Instability – Nigerian Stocks withstood the EndSars protest after a few days of panicking selling. However, with tensions still in the air, any more political skirmishes could depress the market severely. Nigerian politicians have so far demonstrated an impressive array of skills in managing internal crisis so I am betting that they can manage this. However, with the economy in dire straits, this remains a huge concern for me.
Bombing – I shuddered during the week when I heard there were meetings going on in the Niger Delta to discuss states in the North who were mining and selling Gold. The last thing we need now is another bombing from Niger Delta Militants. If that happens then expect a massive sell off.
Oil Prices – Nigerians stocks remain perfectly correlated to oil prices. It is a rule that has remained for decades and still matters. Whilst we have seen oil prices dipped below $40 in recent weeks, it has found ways to creep above it. The recent wave of covid-19 cases globally remains a concern but this is largely mitigated by the discovery of a possible Covid-19 vaccine.
Foreign Investors – During the week, the operators of the MSCI Index for frontier markets decided to take no action on Nigeria. This means despite all the challenges we have with forex; they still see the Nigerian stock market as a destination for foreign portfolio investments. I do not expect foreign investors to continue to invest in Nigeria due to challenges with capital control, but our market is still attractive. In fact, I hear stocks like Nestle, Nigeria Breweries, International Breweries are attracting significant foreign portfolio investments.
Where does this lead to?
We are now on the cusps of a new market order. If interest rates remain this low, we will continue to see a stock market that will be robust and resilient. Our bold theory is that we might never see another major stock market crash if we sustain this bullish ride for another full quarter.
Explore Data on the Nairametrics Research Website
- Investors will demand more accountability from the management of companies while regulators will enforce transparency.
- Companies will publish interim and annual reports regularly and will reinforce their investor relations business.
- This will trigger confidence in the stock market allowing for sustained investing. At some point soon, we will see the return of mega IPOs, Public Offers, and right issues.
- Retail investors will flock into the market, but they will be better informed about what to buy and what not to buy.
- This might all sound overly optimistic but let us remember the US stock market has been on a bullish ride since 2008.
Indeed, the global equities market will remain sustained on the positive side if governments in the west continue with their quantitative easing programs that pump in cheap money into the economy.