Monday, 29 April 2013

Nigerian Equities on the Rebound

Oscar-Onyema-18.jpg - Oscar-Onyema-18.jpg
NSE DG, Oscar Onyema
Goddy Egene reviews the performance of the stock market in the last five years, predicting that with the reforms initiated by the financial system regulators, on the back of support of the Goodluck Jonathan administration, the Nigerian bourse is expected to make a full recovery of its 2008 and 2009 losses by the end of this year

From all indicators, the Nigerian stock market is forecast to end 2013 positively and is expected to continue to recover the losses it suffered in 2008 and 2009. The market had lost over half of its value (60 per cent) by the end of 2009 as the contagion from the global financial crisis spread to the Nigerian economy and a local banking crisis combined to end an unprecedented two-year bull run.

Prior to the crash, the boom period chiefly buoyed by the banking consolidation exercise and repeated capital raising exercises by the banks, had seen the NSE All Share Index (ASI) rise by 37.8 per cent in 2006 and 74.7 per cent in 2007, while market capitalisation rose by 67.5 per cent and 140.83 per cent respectively during the same period.

But the bubble burst in 2008, leading to a depreciation of the ASI by 46 per cent and 34 per cent in 2008 and 2009 respectively, and the downward spiral of market capitalisation by 32 per cent and 28 per cent in 2008 and 2009 respectively.
As asset prices fell on the local bourse, foreign investors fled while domestic investors retreated to count their losses. Although the market witnessed a recovery of 58.6 per cent by market capitalisation in 2010, the recovery was short-lived as the market closed 2011 with a decline of 19 per cent.

However, 2012 marked the beginning of the full recovery for the Nigerian bourse as it posted a growth of 37 per cent, while the ASI closed positively at 35 per cent. That growth is expected to continue this year, if the performance of the market so far, coupled with the stellar results posted by quoted companies, is anything to go by.

While the market has recorded a growth of about 18.1 per cent by market capitalisation this year, weighed against the same period last year, the market has advanced by about 60 per cent as at last Friday, April 26. The ASI rose from 22,109.76 on April 26, 2012 to 33,159.08 exactly one year later, while market capitalisation has risen by 50 per cent of N3.5 trillion from N7.1 trillion to N10.6 trillion during the same period.

With this performance, the market has recovered 84 per cent of its 2008 peak. The equities market had peaked in March 2008 with a capitalisation of N12.6 trillion before crashing to a low of N6.27 trillion in November of 2011.

Strong Global Showing
Measured against its peers, the 37 per cent growth recorded in 2012 placed the Nigerian market among the top best performing equities market in the world. It was also the third best performing bourse in Africa, closing only behind Egypt and Kenya.

That recovery was consolidated in January 2013 when the market closed as the best performer, chalking up 13.4 per cent in that month alone. Kenya, which was ahead of Nigeria the previous year, placed second behind Nigeria at 8.3 per cent, Mauritius returned 4.1 per cent, while South Africa and Egypt ended the month with 2.8 per cent and 2.6 per cent respectively.
Factors Driving the Rebound
The various market reforms in the financial system, which have been made possible because of the strong support and non-interfering posture of the President Goodluck Jonathan administration, have been cited as one of the main factors that have contributed to the market’s rebound.

In addition, the regulatory authorities in the capital market – the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) – have stepped up their supervisory roles. This was helped by the change of leadership and management teams at SEC and the NSE, and the imposition of sanctions on erring operators who had flouted market rules. This development, it is believed, would largely curtail a repeat of the market exuberance and insider trading that led to the 2008 crash, which in turn has helped to restore investor confidence and is attracting more interest in the market.

The role of the Central Bank of Nigeria (CBN), which introduced wide-ranging reforms in the banking sector and the setting up of the Asset Management Corporation (AMCON) to buy the bad debts of banks, cleaning up their books and giving them a new lease of life to resume lending, is another major driver of the rebound.

With the reform initiatives and gradual return of confidence in the market, foreign portfolio investors who had fled the market in droves between 2008 and 2009 started to make forays into the market and take positions by the end of 2010. Attractive returns on equities, which were largely depressed and were selling at well below their valuations, encouraged many foreign portfolio investors to participate in the market. They realised that the returns obtainable from the Nigerian market were much higher than what they could realise in the more mature markets of North America, Europe and parts of Asia, among others.

Like several emerging markets, foreign investors use the Nigerian market for portfolio balancing purposes, with their main interest being the multinationals listed on the bourse such as Nestle, Cadbury, Unilever, Guinness and Nigerian Breweries Plc (owned by Heineken), among others.

Indeed, a review of the share of foreign participation in the local stock market between 2007 showed that foreign portfolio investment rose consistently from 15 per cent in 2007 to about 66.8 per cent in 2011 and declined to 61.4 per cent in 2012 and 31 per cent in the first two months of 2013. This quiet withdrawal of foreign investors has led to the ascendancy of local institutional and retail investors, thus reducing the risk of external shocks to the domestic market.

Accordingly, domestic investors, both institutional and retail, have increased their share of the market from 33.2 per cent in 2011 to 38.6 per cent in 2012, and to 61 per cent in the first two months of 2013, according to the NSE. This indicates a return of confidence in the market following the reforms embarked upon by the regulators.

Irrespective, foreign companies continue to take up increasing stakes in Nigerian companies as part of a strategy to increase their global spread. For example, Tiger Brands, South Africa’s biggest food company, bought controlling stake in Dangote Flour Mills last year. In addition, foreign portfolio investors have upped their asset allocations to the Nigerian market in an effort to take advantage of the high returns available on the bourse.

Another factor that contributed to the market’s recovery was investors’ reactions to the impressive results declared for the 2012 financial year. Earnings have risen for many Nigerian companies, especially the banks, after their balance sheets were cleaned up following the financial sector reforms. The clean up of their balance sheets enabled the banks resume lending, which is reflected in rising interest income levels for the lenders.

Also, many companies have restructured their operations, including those that have diversified their operations to take advantage of emerging opportunities. Flour Mills of Nigeria Plc, for instance, has diversified into cassava cultivation by acquiring Thai Farms Limited to secure high quality cassava flour. UAC of Nigeria Plc acquired a majority stake in Livestock Feeds Plc to consolidate its leading position in the agro-allied industry.

Other measures that have contributed to the market’s rebound include the decision by the NSE to introduce market making and securities lending in September 2012 as well as raising the cap on daily price movement to 10 per cent from five per cent for the stocks in the market making segment. These two measures, which began on an incremental basis, have led to several stocks rising beyond their pre-2008 levels.

Although the rate of growth in the market has slowed in the last three weeks due to profit taking, it is expected that overall growth would be sustained in the long run as more foreign and domestic investors show interest in the market.


• The ASI by the end of trading on April 26, 2013, rose to 33,159.08, a 60 per cent gain over its level of 22,109.76 on April 17, 2012.

• Market capitalisation closed at N10.60 trillion on April 26, representing a 50 per cent rise of N3.5 trillion over its value of N7.1 trillion a year ago.

• The market has responded to 2012 full-year results, beginning with the banks. In the buildup to the release of results, prices rose significantly as investors took positions in anticipation of good returns, but the rise soon abated due to profit taking. Analysts expect the market to continue to trade “sideways” in the following weeks as investors respond to earnings results and corporate actions.

• Already, some first quarter results show a continuing rising trend in both income and profit. Sterling Bank Plc’s three-month result showed that gross earnings rose 22.4 per cent to N19.84 billion, from N16.21 billion a year ago, while profit after tax rose to N2.72 billion, a 96 per cent increase over N1.39 billion in March 2011. For Diamond Bank Plc, first quarter interest and similar incomes rose 36 per cent to N33.84 billion, from N24.92 billion in the corresponding period last year.

• Some brokerages made forecasts at the start of the year that the market will return at least 15 per cent this year, while others said it would rise as much as 23 per cent.

• Barclays Bank on April 1 added 10 Nigerian sovereign bonds to its $1.7 trillion local currency emerging market bond index. This follows on the heels of the addition of Nigerian government bonds on October 1, 2012 to the JP Morgan Government Bond Index-Emerging Markets (GBI-EM), making Nigeria the second African country to be added to the index after South Africa. JP Morgan said the inclusion would attract $1.5 billion to Nigeria. Both inclusions are indications of growing investor interest and confidence in Nigerian bonds.
Source: ThisDayLive

No comments:

Post a Comment