Nigeria’s Stock Market Sheds $2bn in May as Investors Weigh Options

The rally witnessed in Nigeria’s equities market in April was halted in May as rising yields in the fixed income securities market reduced demand by investors.

Owing to this, the market, which gained N418 billion in April, depreciated further by N812 billion in May.

The market capitalisation fell from N20.847 trillion at the beginning of the month to close at N20.035 trillion yesterday. Similarly, the Nigerian Exchange (NGX) Limited All-Share Index (ASI) declined by 3.5 per cent from 39,834.42 to 38,437.88 on Monday.

The 2020 full year and 2021 first quarter(Q1) corporate earnings had triggered high demand for stocks, leading to a gain in April after a bear run in February and March.

However, the gain could not be sustained in May following indecision among traders, who are weighing their options on whether or not to shift investments to the rising yields in the fixed income market and other investment options.

For instance, yield on long-term 30-year sovereign bond has appreciated from seven per cent in December 2020 to 14.2 per cent last Friday and more institutional investors and other risk averse traders are getting attracted to the investment space.

Commenting on the market performance, the Chief Research Officer, Investdata Consulting, Mr. Ambrose Omordion, said the weak outcome resulted partly from indecision among the traders despite better-than-expected corporate earnings in the midst of weak economic data and rising insecurity challenges.

“The low traded volume and mixed sentiment for the month May is a reflection of inactive position of institutional investors as recovery yields in the fixed income space is diverting funds from the stock market.

“With the outcome of last Monetary Policy Committee (MPC) meeting, prevailing economic data and corporate earnings that are looking up, we envisage a reversal in trend as March year end accounts have started to hit the market and half-year interim dividend/ earnings season is underway. “Coupled with oil price trading around $70, we have projected the year 2021 to close positively despite the ongoing mix trend here and there.

“This is a vaccine year with breakthroughs in vaccines that had led to global vaccination, which are supporting economic recovery of different climates and oil prices in the international market. The month negative performance is an opportunity for discerning investors and traders to position and build wealth,” Omordion added.

Earlier, some operators and analysts had said the rising yields might prevent the rally witnessed in April from extending to other months.

The Executive Director, NOVA Merchant Bank, Mrs. Funke Okoya, had said whilst rising yield might undercut the rally on equities in the months ahead, the discounted valuation on stocks was an opportunity for passive investors to build portfolios, capable of delivering superior returns over the long term.

Okoya stated that as much as the rising yield presents a downside risk to equity offerings and they continue to rebalance clients’ portfolio to reflect their proactive view on the different segments of the market and broader macro outlook, they remained buyers of equities.

She said: “Albeit we are very selective in our stock options and this is perhaps one of those times when it is clinically important for portfolio managers to ensure investment decisions on discretionary portfolios are strictly aligned with client profiling, which is one of our fundamental guiding principles in either advising clients or managing their wealth.

“The rising yield environment also reinforce the call of NOVA Merchant Bank’s investment banking subsidiary for corporate clients to accelerate their debt capital plans and execution, to take advantage of the yield environment, which has seen a steep rise over the past four months.”

A financial analyst, Abiola Rasaq, said with rising yield on fixed income market, investors might be reducing exposure to equities, a phenomenon which may reflect the moderating risk appetite of both retail and institutional investors.

“Notably, the search for higher return on investments, which stimulated capital flows into equity market late 2020 and early 2021, especially from local pensions and traditional asset managers, is gradually easing, given considerable rise in yield on fixed income securities, which have seen average of 550 basis points rise year-to-date,” Rasaq said.

According to him, though real interest rate or put differently the inflation-adjusted return on fixed income securities is still negative given the 50-month-high headline inflation rate of 18.17 per cent, compared to the average 14.1 per cent yield on the 30-year benchmark bond, the year-to-date rise in interest rate (using the Soverign yield curve as a proxy) was likely to undermine cash allocation to equities, especially as institutional investors may become concerned that higher inflation and relatively weak economic recovery may weaken corporate earnings growth in the near term.

He said: “Double-digit return on risk-free sovereign notes may unfortunately undermine some progress made over the past 18 months, when the lower interest rate environment partly helped in reducing the crowd-out effect of public sector borrowing in stimulating capital flow to the private sector.”

Goddy Egene

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