Equities investors in the Nigerian capital market have every reason to cheer as the value of their investments, measured by the Nigerian Stock Exchange (NSE) capitalisation, went up by N8 trillion ($20,986bn) in 2020.
This translated to a 60 per cent gain.
The market capitalisation rose from N12.969 trillion ($34,021bn) in 2019 to N21.057 trillion ($55,238bn) as at the close of the market on Thursday.
At the close of trading on Thursday, the NSE All-Share Index (ASI) delivered 50 per cent return, rising from 26,842.07 to close at 40,270.72, compared with a decline of 14.6 per cent in 2019 and 17.81 per cent in 2018.
The gain recorded by the Nigerian bourse in 2020 is the best among 93 equity indexes tracked by Bloomberg.
The gain came amid the COVID-19 pandemic and economic recession, which were expected to affect the performance of the market.
Despite the lockdowns and disruptions occasioned by COVID-19 pandemic, the unrests due to #EndSARS protests against police brutality in October, the stock market survived hyperinflation and economic recession to end the year higher.
The Nigerian equities market rode on low yields in the fixed income market and renewed interest by domestic investors to outperform other global markets.
Although the stock market was oversold with many prices trading record lows at the beginning of the year, the Central Bank of Nigeria (CBN)’s restriction of domestic investors from participating in its open market operations (OMO), as well as the interest rate cut, boosted the patronage of the market in 2020.
While many foreign investors exited the market following the outbreak of the COVID-19 pandemic and difficulty in accessing forex for the repatriation of their returns, domestic investors flocked to the market in search of high yields.
This trend was maintained as domestic investor accounted for 65.2 per cent or N1.239 trillion ($3,250bn) out of the total N1.899 trillion ($4,981bn) invested in equities as at the end of November 2020. Foreign investors staked N659 billion or 34.7 per cent.
The Chief Executive Officer (CEO) of NSE, Mr Oscar Onyema, has attested to the role the CBN played in the rally witnessed in the stock market, saying that its policies made the stock market attractive to investors.
“I must say that some of the policy changes include the CBN policy that domestic institutional investors should stop participating in the OMO market. That has driven significant funds into the Nigerian Treasury Bills (NTB) market and some of those funds have found their way into the equities market.
“We have also seen a cut in interest rate. That was a significant move in support of equities as an asset class. What investors tend to do is to look for yield,” he said.
With inflation rate at 14.89 per cent, yield or coupon or interest rate at the fixed-income market hover between less than one per cent and a little above one per cent for the one-year instrument to some seven per cent annual coupon for the two-decades-and-a half instrument, Nigerian equities’ return is the most attractive and the only positive-yielding return in 2020.
Onyema explained that since the Nigerian economy has shifted into a negative real interest rate environment, investors are now in search of investments that would give them higher yields and returns, noting that the stock market provided those investments.
“Given the record dividend yield available in the Nigerian market and given the strong fundamentals of a number of companies that are listed on the Exchange, it makes sense that as investors try to rebalance their portfolio, they would look at equities,” Onyema added.
Commenting on the market performance in 2020, an excited President of the Chartered Institute of Stockbrokers (CIS), Mr Olatunde Amolegbe, described it as good news for investors and Nigeria.
“ It is heartwarming after suffering the hangover of the global financial crisis longer than most other countries. The most gratifying fact about this performance is that it is actually backed by fundamental performances of our quoted companies. The performance also underpins the need for improvement in liquidity flow to the market through various sources that we at the CIS have been advocating in the last few years,” he stated.
Amolegbe explained that the reduction in the interest rate and fixed income yield has been a net positive for quoted companies that are now able to borrow cheaper to finance their operations as well as for market operators that can see renewed interest in the financial markets.
“The NSE’s performance is also an affirmation of our market’s increasing correlation with other global market markets. I expect the trend to continue into the New Year. Investors should, however, ensure that they speak to their certified stockbrokers before taking any decisions,” he added.
Analysts at Cordros Securities called for an extension of the equity bull market.
According to them, the performance in the fixed income market will be a tale of two halves, saying they expect yields to remain in the low single-digit territory through the first half (H1) of 2021 with a moderate uptrend to account for reduced market participation as investors seek yields in other asset classes.
They stated: “However, in the latter part of the year, we believe that a combination of weak market participation, revision of monetary policy to a tightening cycle, widening fiscal deficit, and fragile macroeconomic environment will lead to an increase in yields over 2021. Similar to the fixed income market, we also expect it to be a tale of two halves for Nigerian equities in 2021, with the market delivering further upside in the first half of 2021 before retracing slightly in the second half on an expected reversal in fixed income yields. The sources of risks remain plenty, the macro story remains uninspiring, and valuations are elevated.”