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.
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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.