The NGX All-Share Index and Market Capitalization appreciated by 1.97% and 2.00% to close the week at 104,421.23 and N57.158 trillion respectively.
Year to date, the All-Share Index is up 39.7% as investors continued their bullish sentiments towards Nigerian equities.
Meanwhile, as the exchange rate between the naira and dollar continues to weaken, the impact is also being felt on main street.
Businesses typically react by adjusting their prices to reflect the depreciation margins. This way they basically pass on the depreciation to their customers.
In some cases, prices are adjusted upwards in combination with shrinkflation.
But on the capital market, investors are also gauging the value of stocks in relation to exchange rate depreciation. According to some fund managers who spoke to Nairametrics, the valuation of Nigerian stocks is also impacted by the realities of the exchange rate depreciation and as such could be reflected in valuations.
As the naira weakens, Nigerian equities become cheaper and affordable in terms of foreign currency and by market dynamism, the share prices are adjusted upwards.
Foreign investors may also find Nigerian equities more appealing due to the increased purchasing power of their foreign currency. With the ability to acquire more shares for the same amount of foreign currency, demand for Nigerian equities could rise. As demand intensifies, it is believed that this trend will exert upward pressure on share prices.
Indeed, in an environment marked by volatile exchange rates, high inflation, and low returns on traditional investment avenues such as bonds and savings accounts, the stock market emerges as an attractive option for investors seeking higher returns.
This shift in investor sentiment toward the stock market could positively impact its valuation. As more investors allocate their funds to stocks in search of better returns, the increased demand for equities may contribute to higher valuations across the market.
Generally, investors look for opportunities that yield positive real returns, and the stock market provides the potential for capital appreciation that surpasses inflation, as evidenced by its recent growth trends.
Following the devaluation of the Naira last year, the financial and investment landscape in Nigeria has increasingly favored the stock market.
The Nigerian Exchange Group (NGX) closed on a bullish note in 2023, with the All-Share Index (ASI) reaching impressive levels.
As of February 5th, 2024, the NGX maintained its bullish momentum, concluding with a market capitalization of N56.75 trillion and an ASI of 104,421.23 points
As the Naira continues to weaken, it is like that this could impact the fundamentals and overall value of the individual listed companies.
Take, for instance, many of these companies have substantial assets denominated in foreign currencies. As the Naira weakens, the value of these assets increases. This uptick in asset value contributes to the overall worth of the companies holding significant assets denominated in dollars.
Investors perceive companies with higher asset values as more financially stable and valuable. The reassurance of a strong asset base can instill confidence in investors, leading them to be more willing to invest in these companies. This increased investor interest can drive up demand for the company’s shares and consequently raise share prices.
In the first nine months of 2023, due to the weakening of the Naira, banks recorded significant foreign exchange gains. This positively affected their overall bottom line and subsequently impacted their valuation.
As the Naira continues to weaken and assets denominated in dollars are repriced, profit margins improve for financial services companies, leading to better bottom-line financial performance.
Whilst this does not extend to manufacturing companies, investors still perceive them as undervalued when valued in dollars often leading to an asset pricing.
Moreover, as investors anticipate further Naira depreciation, they may choose to invest in companies with substantial US dollar-denominated assets, and that will reflect in their valuation.
In this context, companies, such as Dangote Cement, UBA, Zenith Bank, Access Holding, FBNH, GTCO, MTN Nigeria, BUA Cement, Seplat Energy, and others, with a market capitalization, worth over one trillion Naira and hold a significant portion of their assets denominated in dollars, the market seems poised for upward valuation.
The repricing of their assets could potentially lead to an increase in the overall asset value of these companies. As a result, investors may perceive them as having heightened intrinsic value, which could stimulate demand for their shares and exert upward pressure on share prices.
