As equities listed on the Nigerian Stock Exchange, NSE, continue to record upward movement, stock market analysts are afraid that the current rally may not be sustained as most of the stocks that have recorded high returns this year may not be supported by adequate fundamentals.
Over the past one year, the stock market has been on a roller coaster, beating the expectations of those that had projected that the 2008 meltdown would take a little longer to ebb. Just in the month of May, the NSE All Share, ASI, Index has risen by nothing less than 7.64 percent. From rock bottom of N8 trillion in 2011, the NSE's market capitalisation has risen to over N12 trillion marks, reaching almost the height it was before the market crashed. The All Share Index has also crossed the 39,000 basis points.
Analytst believe that the recent surge in the market, which comes after a slight pullback in April, has been dominated by bellwethers (the top 10 most capitalised stocks have increased by an average of 8.8 percent in the month). They noted that the development makes the current rally a defensive one rather than a risk-on risk-off rally as was witnessed at the beginning of the year.
Analysis of movement on the share prices of various companies across different sectors showed that they have recorded unprecedented growth within the year. For instance, the top five gainers in the market in the last few weeks each rose by over 100 percent.
Livestock Feeds for instance has so far returned 773.52 percent to investors as the rally continues; Chemical and Allied Products has risen by 334.62 percent; Eterna Plc has gone up by 202.27 percent, May & Baker has returned 127.64 percent, while Neimeth has gone up by 140.38 percent. Evans Medical has recorded a growth of 256 percent. McNichols recorded 179 percent, while Wema Bank Plc, Cement Company of Northern Nigeria Plc appreciated by 128 percent and 103 percent respectively.
Other stocks among the top 10 that fetched investors handsome capital appreciation in five months include: Cadbury Nigeria Plc. (91 percent); United Bank for Africa Plc. (86 percent); ABC Transport Plc. (84 percent); PZ Cussons Nigeria Plc. (82 percent); Forte Oil Plc. (81 percent); Presco Plc (76 percent); Lafarge Cement WAPCO Nigeria Plc (67 percent); Julius Berger Nigeria Plc and International Breweries Plc (62 percent apiece).
According to Mr. Johnson Chukwu, Managing Director/CEO, Cowry Assets Management Ltd, the stocks that have appreciated in prices since the beginning of this year could be categorised into two - those supported by strong fundamentals and those that are appreciating as a result of relative pricing or ripple effect.
"While it may be difficult at the moment to say that bubbles have built up in the market, it is obvious that those stocks that appreciated as a result of relative pricing are overvalued. "This means that at some point the market has to go through a correction so as to reflect the actual valuations of such stocks. When the correction occurs, it will likely affect even those stocks that are supported by good fundamentals," Chukwu posited.
He noted that it was imperative for the regulators of the Nigerian capital market to lookout for triggers of market crash such as massive inflow of foreign capital targeting a particular asset class; stock prices not supported by earnings, scramble for equities by all and sundry, as well as availability of cheap credits and aggressive tightening of monetary policy.
Speaking in the same vein, David Adonri, Managing Director/CEO, Lambert Investment & Securities Ltd, said that several stocks have risen meteorically during the year.
He noted that even though a lot of the quoted companies are recording improvement in their fundamentals and expanding their operations, however, their extraordinary growth is beyond the strength of their fundamentals, adding that market correction was a certainty.
He said, "A lot of hot money has flowed into the equities market giving cause for caution. The stocks affected are those that foreign investors are familiar with and invest heavily in. They are mainly multinational manufacturing companies. The stock market moves in cycles. We are at the high point now; Market correction is a certainty," Adonri added.
Also speaking, Mr. Wale Oluwo, an Economist and an independent analyst, explained that the market prices have been so low over the years, saying that the rise in share prices of companies that have recorded unprecedented growth is ordinarily expected to be very steep.
He explained that announcement of results for companies with December year ends (most companies fall into this category), a good number of the results have also been very exciting, has added to the upward movement experienced so far in the market.
"Yields on bonds have been dropping hence some institutional and international investors have been restructuring their portfolio in favour of equities, while keeping their excess cash in treasury bills pending recovery of the bond market. We have had inflow of funds from foreign investors ('hot money') finding their way into the capital market," he said.
For Mr. Bismark Rewane, the Managing Director, Financial Derivatives Company, "Earnings are underway and that could instill more volatility. All the while, the market is looking for a pullback. There are question marks as to whether the earnings will match investors' expectations.
There are already signs that the consumer goods companies might not meet expectations as the brewery companies are showing slowdown in sales and decline in profit due to the high finance charges.
There has also been weakness in the earnings of agricultural companies stocks due to a sharp decline in commodity prices (mainly crude palm oil). Maybe we might see a slight pullback in the second half of the year before stocks mover higher again."