Will Nigeria’s current stock market bull run last?

The Nigerian stock market is currently on course to hit and perhaps surpass its highest-ever performance. This has not happened since 2008. The All-Share Index closed yesterday (Tuesday) at 60,715.04, down from 61,960.92 on Monday. The Tuesday close, which resulted from a 1.99 per cent decline in market activities, showed a year-to-date return of 18.47 […]

The Nigerian stock market is currently on course to hit and perhaps surpass its highest-ever performance. This has not happened since 2008. The All-Share Index closed yesterday (Tuesday) at 60,715.04, down from 61,960.92 on Monday. The Tuesday close, which resulted from a 1.99 per cent decline in market activities, showed a year-to-date return of 18.47 per cent, which is the margin by which the market this year has risen above its closing value last year. 

 In other words, on average, an investor who invested the same amount across all the stocks listed on the local bourse would by yesterday have gained by that margin. But this average return actually hides the variations across industries, sectors, and even individual stocks.   

For some stocks, the gain has been quite fabulous, as investors have been laughing on their way to the bank. A number of stocks have doubled in price, a few more than doubled, while at least one or two have quadrupled in price since the turn of the year. Stocks that have gained between 100 per cent (doubled) and 300 per cent (quadrupled) this year include Tripple Gee; Eterna; Transcorp; Ikeja Hotel,  Japaul Gold, AccessCorp, and Etranzact.   

While the market has hit a 16-year high with the attainment of ASI of 60,000 mark, it is yet to return to its highest level ever. That all-time high on this market was achieved on May 5, 2008, when the All-Share Index closed at 66,371, while the market capitalisation rose to N15.64trn. That turned out to be a climax. The following day, the local bourse turned south as it began a descent and continued for months, with the global financial meltdown set fully coming into force. 

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The drivers of the current bull run are many. The principal factor seems to be the new political atmosphere. Investors, both local and foreign, have seen the turn of events as a sign of stable polity that could in turn engender economic recovery and stability. They have seen the reforms and believe in them. Therefore, there will be both industry-and firm-level effects of these policy reforms on the market performance. 

Some of the policy pronouncements by the new administration so far have also contributed to this, chief among them being the unification of the multiple exchange rates that held sway for so long.  With this, foreign investors who left in droves as the restrictions on foreign exchange hampered their ability to repatriate their profits and even capital are definitely reconsidering their positions. They may not have returned now, but surely some of them are reviewing the Nigerian market. 

We are, therefore, likely to see more interest being shown in Nigerian equities going forward, as some level of stability returns to the macro-economy through policy reforms and opportunities created by overall global market trends. 

But it is easier to excite markets than to retain that excitement. Markets sometimes act before they reason, which is a key factor to consider in assessing the rising momentum. The policies on which the market is rising could also become a stumbling block to a sustained bull run. 

For one thing, all is not well yet with the economy, and nobody knows how long this could be. The manufacturing industry, the hub of the economy, is still in the trough, buffeted by high inflation and other constraints, including infrastructure challenges. This inflationary spiral is not likely to go away soon, as every sector of the economy adjusts to the effects of the removal of subsidy on petrol.

With the rumoured plan of an electricity price increase, more pressure will be put on production costs across all sectors, with heavier power consumers being the most affected. 

And, as has been widely reported this week, the Stanbic IBTC’s Purchasing Managers’ Index for June has indicated that business confidence remained low (it actually dipped) in that month. Purchasing managers would have met much higher prices as they placed orders to replenish production materials in June, just immediately after the removal of the subsidy. Their reports, expectedly, would have elicited a negative sentiment based on the higher prices they met, hence the decline in industry confidence. This is more so as the report said the companies, expecting the inflationary pressures to continue, actually wanted to stock for longer periods. 

Therefore, prices of goods spiked in June, and are not likely to decline soon. Prices of consumer goods are rising constantly, a fact that bewildered households have come to accept: from bread to milk to soap, etc, with each rising in price almost every two or so days. Rising prices are definitely not good for operators, especially manufacturers as this could provoke consumer resistance. But their input costs are rising, so ultimately their margins could shrink. This is evident on the stock market price list, which shows that manufacturers are few among the top gainers so far this year. If the price surge continues, it could hurt their performance quite significantly. 

Therefore, what happens to indices such as inflation, PMI, and others, will go a long way in influencing the trajectory of prices on the stock market, depending on the industry and stocks in question. The market is not a sympathizer. It will cheer a company when it does well, or reasonably expects that the company will do well, by buying more of a company’s stocks and therefore help bid the stock price up, as is happening now. 

The same market will not hesitate to reprimand the company, however, once the firm’s performance falls short of the market’s expectations. Sometimes, it will even do this (investors sell the stock) before they bother to find out what happened. 

Expectation is part of the driving force behind the current bullish market trend, with many investors taking positions. The test of their holding period will come when earnings reports for this quarter start rolling in. Third-quarter reports from the listed companies will give an indication of where the economy is headed for the rest of the year. 

Even before then, those investing for short-term gains will continue to sell as price gains meet their targets. Overall, the stock market promises to provide a haven to investors this year, as they seek shelter from the effect of inflation, currently standing at 22.4 per cent.