2023 has been a good year for investors in the Nigerian equity market, as it has maintained a bullish trend for the better part of the year. OLUWAKEMI ABIMBOLA highlights some of the major factors that have been driving market trends in 2023
The Nigerian Exchange Limited closed negatively in the years preceding the elections of 2015 and 2019, but bucked the trend last year, posting a 19.98 per cent return. It has sustained this trend this year, despite the uncertainty that trailed the 2023 general elections.
On the first day of trading after the February 25 presidential election, the market hit N30tn capitalisation. A milestone which analysts said reflected local investors’ optimism about the policies of the winner of the presidential election.
Sharing the analysts’ perspective, the Managing Director of Arthur Stevens Asset Management Limited, Tunde Amolegbe, said, “For the elections, the market closed down for the two previous election cycles in 2015 and 2019. However, for the elections in 2023, the market broke from the conventional trend. Even after the elections, the market remained bullish, showing that inflation was good for it because it was the only place where positive real returns could be achieved when taking into account potential holding period returns.
“Additionally, the perception that whoever of the three leading presidential candidates who wins the election will be good for the market because they will all outperform the current administration. In fact, the equity market was bullish even after the elections and up to the announcements of results.”
Apart from the unusual response of the market to elections, investors also responded to the increasing inflation by playing more in the equity market because it was giving higher returns than the fixed-income market.
Corporate raids
Just as the audited 2022 financial reports of listed companies came in, the market woke up to the news that billionaire businessman, Femi Otedola, had bought about 5.52 per cent stake in Transnational Corporation Plc.
While the share acquisition was welcomed by the company and minority shareholders, he soon sold to them the Chairman of Transcorp, Tony Elumelu. It also served as a harbinger of what was what to happen a few weeks down the line.
On July 7, a historic trade took place on the Nigerian Exchange Limited as a company linked to a former Chairman of FBN Holdings, Oba Otudeko, bought over four billion units of shares of the financial institution.
It was an acquisition that attracted a lot of market reactions and the Securities and Exchange Commission said it was investigating the deal. This acquisition has yet to be reflected in the books of FBN Holdings as of the end of the third quarter.
Fuel subsidy removal, forex harmonisation
In his inaugural speech, President Bola Tinubu announced the end of the fuel subsidy regime and a directive to the Central Bank of Nigeria to get a handle on the foreign exchange situation.
He said, “The fuel subsidy is gone,” after he was sworn in as Nigeria’s 16th President.
Tinubu added that his government would instead channel funds into infrastructure and other areas to strengthen the economy, adding that a “unified exchange rate” is guaranteed under his administration. He also promised to remodel the economy to bring about growth as well as develop the Gross Domestic Product through job creation.
In the aftermath of this policy, petrol prices have almost tripled, causing a spike in transport costs. It has also hit small businesses and millions of households, who rely on petrol generators for power due to intermittent grid supply.
On the stock exchange, listed oil companies felt the impact positively, as their revenue increased in the first half of 2023. Increasing global demand for fuel was also a contributory factor.
According to the National Bureau of Statistics, the average retail price paid by consumers for petrol in June 2023 was N545.83, marking an increase of 210.32 per cent relative to the N175.89 recorded in June 2022.
On the foreign exchange front, which was one of the reasons that foreign investors exited the Nigerian market, the apex bank announced the harmonisation of the segments of the currency market, which resulted in a floating of the naira.
The decision was welcomed by stakeholders but there were concerns about its implementation. The Managing Director of Cowry Asset Management, Johnson Chukwu, enunciated, “The key thing that is missing in the reforms is the level of thought process that went into it. The exchange rate has not been able to achieve some stability. For economic agents, it doesn’t really matter what the exchange rate is, what matters is the level of stability.”
According to The PUNCH findings, nine firms lost N960.18bn to the new forex policy in the second quarter with more losses projected.
According to the half-year financial reports of the firms, the steep devaluation of the naira, following the CBN’s attempt to close the gap between the official and parallel rates of the naira, negatively impacted their businesses.
Firms including MTN Nigeria Communications Plc, Airtel Africa Plc, Dangote Cement Plc, Dangote Sugar Refinery Plc, Nestle Nigeria Plc, MRS Oil Nigeria Plc, Guinness Nigeria Plc, Nigerian Breweries Plc, and Seplat Energy Plc recorded N960.18bn as foreign exchange losses in the first six months of 2023.
For banks though, it was gains, which led the apex bank to issue a directive banning them from using the forex revaluation gains on their operations so as not to worsen the FX situation in the country. As of now, the local currency is still struggling to find stability.
Multinationals’ exit
As the macroeconomic conditions of the country continue to bite, some multinationals announced plans to delist from the capital market and exit the country.
The exit of the companies will wipe over N400bn off the market capitalisation of the NGX.
The companies that had indicated an interest in delisting or delisted from the local bourse this year included energy company, Oando Plc; consumer goods companies, Glaxo SmithKline Consumer Nigeria Plc and PZ Cussons Nigeria Limited. Others are Union Bank of Nigeria, Capital Hotel and Coronation Insurance.
The latest multinational to announce its exit is consumer goods giant, Procter & Gambles, which said it would dissolve on-ground operations in the country.
The Chief Financial Officer of the group, Andre Schulten, during his presentation at the Morgan Stanley Global Consumer and Retail Conference, explained that it was difficult to do business in Nigeria as a dollar-denominated organisation and the macroeconomic reality in Nigeria was responsible for P&G’s latest decision.
Meanwhile, both the food delivery businesses of Jumia and Bolt have shut down operations in Nigeria this December.
Listings
Just as companies delisted from the NGX, some companies also listed. They include the VFD Group, the National Infrastructure Debt Fund managed by Chapel Hill Denham and Mecure Industries which added billions of naira to the market capitalisation.
Speaking on the exits and delisting at the last Capital Market Committee meeting for 2023, the Director General of the Securities and Exchange Commission, Lamido Yuguda, said that the companies driving the market were not exiting but coming in.
He said, “In the Nigerian market, the companies that are really driving the market in terms of market capitalisation, they are not exiting, they’re coming in and they’re coming in droves. What we need to do is given the size of the market capitalisation, we need to raise it higher. And that was that 50 per cent target. That is really what we need, to have more and more of these companies.”
FTSE downgrade
During the year, FTSE Russell, a subsidiary of the London Stock Exchange Group downgraded the Nigerian equities market while MSCI Nigeria Indexes had announced plans to reclassify the Nigerian market from frontier markets to standalone markets status.
Reacting to this, Yuguda said, “We noted with concerns around the recent reclassifications of Nigerian securities indices by FTSE-Russell and MSCI, attributing these to the present foreign exchange liquidity challenges, and its effects on investor confidence.”
In cheering news for the market, international rating company Moody’s upgraded Nigeria from stable to positive on the back of market reforms introduced by the government.
Analysts have said that that upgrade would help to attract foreign investors into the market.
2024 Outlook
Capital market operators were optimistic that the market-friendly reforms done by the current administration would begin the yield increased positive results in the new year, especially in the form of foreign investors returning to the country.
The Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, at the Parthian Partners 2024 Economic Outlook event projected a decline in inflation.
He said, “Inflation is likely to drop in 2024 and could go as low as 17 per cent in 2025. Once inflation begins to decline, the exchange rate naturally appreciates because the exchange rate pass-through starts slowing down.”
On the investor appetite, Rewane said, “Investors are expected to deepen positions in securities that offer higher yields and companies with quality cash flows and realistic earnings goals.”
Meanwhile, the Head of Research at Parthian Securities, Seun Dosunmu, advised investors to expect a high interest rate environment, recapitalisation of the banking industry, capital raising by some listed companies, mergers and acquisitions in the banking industry, prospective energy capacity increase, among other factors.
He also mentioned some likely listings for 2024, including Dangote Foods, Dangote Refinery, and NNPC.
At the 2023 African Economic and Capital Markets Conference organised by Vetiva Capital Management Limited, the Head of Research at Vetiva Capital, Luke Ofojebe, stated that the dominance of local investors in the market may persist into the new year.
He said, “So far this year, the markets have been dominated by local investors as foreign investors are not looking at coming in due to currency instability. Looking at the performance of the market, we have seen declining margins as a result of high operating costs due to the removal of the fuel subsidy and high energy costs due to the hike in electricity tariffs leading to inflationary pressure.
“However, the hawkish stance of the Central Bank of Nigeria has resulted in higher interest income for banks. We expect this trend to continue into 2024 as the CBN is expected to sustain the fight against inflation.
“Also, we are now seeing that the US Federal Reserve will continue its rate hike into the first half of 2024. So, we will see capital flight. Currency weakness is still a major concern. We will see a downward trend till the first half of 2024, until a dovish move from the US Fed in the second half of 2024, and then we may begin to see an appreciation.”
On ways to shore up the value of the naira, Ofojebe said, “If the government wants foreign investors to come into the market, it needs to solidify the source of forex receipts which is oil in this case. The government needs to ramp up oil production to about 1.8mbpd to strengthen the naira.”
