The Nigerian stock market has clawed back COVID-19 losses, making back all the money lost during the pandemic.
The Nigerian All Share Index, which measures performance of the stock market in general terms, fell to as low as 21,300 points in March, the lowest since June 2012. It was 28,843 and 26,216 in January and February 2020 respectively. The drop was due to the COVID-19 pandemic, which triggered a significant outflow of capital from Nigeria.
Investors dumped the stock market during March and April as uncertainty and fear of the pandemic triggered a lock down of the global economy. Market turmoil was also compounded by the crash in oil prices, triggering a significant outflow of capital in equities.
Data from the Bureau of Statistics, reveals only $52.3 million on capital flowed into equities in the second quarter of the year, compared to $639.7 million in the first quarter and $496.8 million in the corresponding quarter in the prior year.
The ensuing devaluation at the end of March 2020 spooked foreign investors; who also feared more devaluation was on its way, thus sealing any immediate hope of a return to the stock market in the second quarter of 2020.
However, since July, the stock market has inched higher in positive territory, ending the third quarter with consecutive gains in July, August, and September respectively. This was the first time since 2017 (second quarter) that Nigerian stocks will post gains in three consecutive months.
What are the drivers: Nigerian Stock Market has often been the bellwether for the economy, reacting way earlier than other markets, in gauging the direction of the economy.
- One of the major drivers for the stock market recovery, is the lack of investable assets available for most fund managers.
- Information from fund managers suggests most of the demand in stocks have been from local portfolio investors.
- Some fund managers who spoke to Nairametrics, revealed the low-interest rate environment means there is limited options where they can throw money into creating an opening for stocks.
- The Stock Exchange’s foreign portfolio investment report, also confirms this viewpoint. Out of the N1.2 trillion transactions in stocks this year, N731 billion was from domestic investors, the highest percentage contribution since 2010.
- Stocks have also been considered undervalued following the March sell-offs, as indicative in the high dividend yield. Dividend yield is the percentage return derived from dividend paid by companies, divided by the share price of the company.
- This year, we have seen dividend yield higher than risk-free investments like treasury bills.
- Another plausible reason for the positive stock performance is the better than expected performances of Banks, FCMGs, Telecommunications sector, and the Agriculture sector of the economy.
Headwinds: Despite the positive performance of stocks, trouble still lies ahead for most investors.
- The Nigerian economy is still in the doldrums with most companies counting losses.
- Banks have performed better than expected, but some naysayers expect year-end profits to be dampened by rising non-performing loans.
- Nigeria’s exchange rate crisis remains a major challenge for investors and the economy at larger, especially as it affects supply chains.
- Rising inflation triggered by devaluation, increased fuel, and electricity prices could lead to higher operating expenses and significantly higher input cost.
Finally, despite these headwinds, stocks remain one of the cheapest and most reliable forms of investing available in a low-interest rate environment. Those who choose the right stocks at the right time, stand to gain the most.