The multi-million-dollar question dominating Broad Street is whether the NGX All-Share Index has peaked.
The Nigerian major equity market has performed like an absolute powerhouse over the past year, with gains of more than 120 percent year over year, and the NGX index easily surpassed the 250,000- index point threshold.
Although a structural crash isn’t certain, a cross-analysis of fundamental pressures and technical indicators shows the market displaying typical signs of a cyclical peak, warning aggressive buyers to exercise caution.
Historically, institutional investors like Pension Funds use Nigerian stocks as a pure inflation hedge against a declining Naira have been the driving force behind the massive bull run.
The Securities and Exchange Commission shortened the trade settlement period by one day to T+1 from T+2, thereby increasing market liquidity, reducing system-wide risks, and improving the speed of capital for investors.
However, the latest price action shows the market’s aggressive bullish run is starting to show subtle cracks, leading to an interim top or a healthy consolidation period.
Fundamentals show exhaustion
Broader macroeconomic conditions are turning negative as large-cap strongholds hit record price-to-earnings (P/E) ratios. Q1’s GDP is growing at about 3.9%, and core inflation is at multi-month record highs, remaining “stickier” than the rest.
- The CBN maintained a fully contractionary (restrictive) monetary policy in response to Nigeria’s sticky inflation. The equity risk premium is declining as risk-free.
- Fixed interest income (Treasury and OMO bills) hovers at historically high levels. “Smart money” is withdrawing liquidity from the stock market as guaranteed 20%+ fixed returns are favored over poor equity valuations.
- Massive gains from foreign exchange revaluation have boosted the balance sheets of major banks and firms, which are major exporters, though firms with high US-dollar debts are showing negative results.
Over recent weeks of testing all-time highs, total daily volume across the exchange has trended lower, even as selective, heavy-cap stocks lift the index.
While top-line revenues appear stellar due to inflationary pricing power, intense foreign exchange pressures and soaring energy costs are eating into the consumer’s goods and manufacturing sectors.
- Dangote Cement and BUA Cement continue to have significant pricing power and act as structural defensive measures despite rising production and energy costs.
- BUA Foods and Nestle Nigeria must balance supply and demand. Though demand is strong, the purchasing power of consumers is steadily declining, and gross margins are under stress due to rising costs of raw materials and imports. Rising prices with declining volumes means a lack of commitment to broader markets. This is a classic ‘exhaustion’ build-up.
There is clear market breadth, and heavy profit-taking and distribution patterns are apparent among large-cap banks like GTCO and Stanbic IBTC, and among selective large-cap industrials.
Meanwhile, speculative funds are almost frantically flowing into small-cap consumer and service stocks. This is a classic market churn and a sign of the end of the market extension phase.
Technical action highlighted Overbought Signals
Looking at longer time frames, the bulls are getting exhausted. Market momentum, measured by oscillators like the Relative Strength Index, is in overbought territory.
These indicators can stay in the overbought zone for extended periods of time, but when the rate of change is declining, buyers are signaling they are exhausted for the time being.
Conclusion
Nigerian equity market still does not envision a catastrophic decline given the current environment. The Nigerian equity market is shifting from an ‘uncontrolled rally’ to a stock-picker’s domain, where profits are being tactically taken on over-extended stocks, and retaining invested capital takes priority.
