Key highlights
- The Nigerian equities market recorded gains in the first quarter of 2023 despite political uncertainty and economic challenges.
- The market faced cash scarcity and political uncertainty during the period, but companies were still able to deliver profits.
- The high inflation rate, weak fiscal position, and currency instability remain major concerns that could impact the performance of the equities market in the coming quarters.
The Nigerian equities market has defied the odds to record gains in the first quarter of 2023, despite the political uncertainty and economic headwinds that characterized the period.
The All Share Index (ASI) gained 5.82% at the end of the quarter, compared to the 9.95% gains recorded in the same quarter of the previous year.
However, the market faced political uncertainty during the period, as Nigerians awaited the results of the 2023 elections, which were won by Bola Tinubu. Nigerians also faced cash scarcity during the quarter as they were braced for long queues and frustrations with the central bank policies.
The economy was essentially at a standstill between the 25th and 28th of February, as Nigerians awaited the results of the election. This also affected market sentiments, as investors were cautious and hesitant to make major investment decisions. However, the equities market was able to brace the odds to post gains during the quarter.
The cash scarcity was due to the new policies of the Central Bank of Nigeria (CBN) which were aimed at curbing inflation and promoting the use of electronic payments. This policy led to long queues at banks and ATMs, as Nigerians struggled to access cash.
Nairametrics research suggested that the economy could contract in the first quarter of the year due to the effect of cash scarcity. India experienced a contraction of 2% when it also embarked on demonetization in 2016.
Companies post profits
Among the top gainers during the quarter were heavyweight stocks such as Geregu (+117%), BUA (+57%), Fidelity Bank (+23%), TotalEnergies (+13%), and MTN (+12%). These stocks drove the gains recorded during the quarter.
Interestingly, the SWOOTS, which represents the most capitalized stocks on the exchange, struggled during the quarter. Most penny stocks drove the gains recorded during the period. This suggests that investors were willing to take on more risks to get higher returns.
The gains recorded in the first quarter of 2023 are a testament to the resilience of the Nigerian equities market, which has been able to weather several storms in recent years. However, there are still concerns about the sustainability of the market rally, especially in the face of looming economic challenges.
Most companies were still able to deliver profits during the period, despite the political uncertainty and economic challenges. This was good news for investors who are also primed to receive dividends in the coming months.
Economic headwinds
One of the major challenges facing the Nigerian economy is inflation, which has remained high in recent months. The inflation rate stood at 17.33% in February 2023, up from 16.47% in January. This is well above the Central Bank of Nigeria’s target range of 6%-9%. The high inflation rate has eroded the purchasing power of consumers and increased the cost of doing business, which could impact the profitability of companies in the coming quarters.
Another major challenge facing the Nigerian economy is the government’s fiscal position, which is still weak. Despite efforts to increase revenue and reduce spending, the government is still grappling with a large budget deficit, which could impact the stability of the economy in the long run.
There are also concerns about the stability of the naira, which has been under pressure in recent months. The Central Bank of Nigeria has been intervening in the foreign exchange market to support the currency, but this has come at a cost. The country’s external reserves have declined in recent months, which could impact the ability of the government to meet its foreign obligations.
Market outlook
Looking ahead to the second quarter of 2023, there is some optimism that the Nigerian equities market could continue to post gains. In the second quarter of 2022, the All Share Index (ASI) gained an impressive 21%, which is a positive sign for the market. However, it is important to note that the ASI has lost in the previous three years before 2022.
- Furthermore, historical trends suggest that election years can be challenging for the equities market. In the election year of 2019 and 2015, stocks posted losses in the second quarter of each year.
- This suggests that political uncertainty and economic instability could impact the performance of the equities market in the coming months.
However, it is important to note that every year is different and there are no guarantees when it comes to investing. Companies that can deliver profits and maintain strong fundamentals could continue to drive gains in the market.
Investors should also keep a close eye on economic indicators such as inflation, foreign exchange reserves, and government policies, which could impact the performance of the equities market.
Overall, the outlook for the Nigerian equities market in the second quarter of 2023 is mixed. While there is some optimism that the market could continue to post gains, historical trends, and economic challenges suggest that investors should remain cautious and seek professional advice before investing in the market.