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Nigerian Stock Exchange: A new sweet spot for foreign investors

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Chief executive officer of the Nigerian Stock Exchange Oscar Onyeama is a happy man. The bourse he led experienced dramatic growth last year and he was awarded the innovative CEO of the year in recognition of his leadership in turning around the bourse.

In January, a grinning Onyeama explained at the Exchange’s 2017 Market Recap and Outlook for 2018 that the bourse had already recorded 12 percent growth making it the world’s third best performing market. Only two or three years ago, the Nigerian stock market had a negative outlook (what investors’ would call a bear market) and closed the year 2016 on a bad note with a 6.17 percent loss.

It meant investors were accumulating major losses– an average monthly loss of 0.27 percent. The market for equities alone dipped by about 610 billion naira between January 1, 2016 and December 30, 2016. The Nigerian Stock Exchange All Share Index also shed 1,495.7 points over the same period to close the year at 26,874.62 points.

‘‘Stocks market analysts have noted that the current bullish trend of the Nigerian equities market will depend on many global, domestic, regulatory and industrial factors.’’

And about 35 percent of the 168 stocks listed on the main board of the NSE recorded no price movement in 2016 with the financial services sector accounting for the largest number of inactive stocks. Foreign activities took a significant decline too, with the highest drop of 73 percent recorded in April 2016.

The bourse was badly cut in the midst of the recession experienced in the country. According to data from the National Bureau of Statistics in 2016, Nigeria’s domestic production was contracting by -0.36 percent, -2.06 percent and -2.24 percent in the first three quarters of 2016 respectively.

Within the same period, prices of raw materials and foodstuff skyrocketed as inflation hit 18.48 percent in November from 9.6 per cent in January 2016. Continuous depreciation of the naira due to forex scarcity further fuelled negative investors’ sentiments too.

The naira officially depreciated from N197/$1 in January 2016 to as low as N305/$1 by December with the local currency trading close to N500/$1 on the black market. A report by Bloomberg in 2016 had rated Nigeria’s naira as one of the world’s worst performing currencies in 2016 alongside the Egyptian pound and Venezuela’s bolivar.

Fast forward to present, Nigeria’s bourse is accelerating– reaching ₦272.48 billion in total transactions in March, a 28.50% jump from the ₦212.05 billion recorded in the previous month. Furthermore, 2018 first quarter results showed the composite NSE All Share Index gained 3,261.32 points or 8.53 per cent to close at 41,504.51 points from the opening level of 38,243.19 points in December 29, 2017.

Investors traded a huge volume of 42.87 billion shares from previous quarter’s 23.26 billion shares traded. Within the period, the market index touched a high of 45,321.82 basis points and it’s looking like nothing will stop its momentum.

Market capitalization for the period was up by N1.384 trillion to close higher at N14.993 trillion, from an opening value of N13.609 trillion. This rapid growth is majorly backed by stronger crude prices, which has been circling around $70 – $75 in 2018. The global oil price has a perfect correlation with the Nigerian Stock Exchange All Share Index.

When prices are rising, sentiments about the Nigerian economy is positive and macroeconomic indices are stabilized. The crude oil trend has helped the country grow its foreign reserves, stabilized its foreign exchange market, and attracted Foreign Portfolio Participation.

Another contributing factor to the positive performance of the market is the creation of the Investors’ and Exporters’ (I and E) FX window by the Central Bank of Nigeria (CBN) and appreciation of some high value stocks in the equity market. Foreign investors are now a lot more confident about the ease of entry and exit of their investments, due to the introduction of the I and E window.

The CBN’s policies have been able to close the gap between the interbank and blackmarket rates, stabilizing prices and controlling imported inflation. Dangote Cement’s shares, which represents a third of the total market capitalization, has been on a steady rise helping to improve the outlook of the market too.

Stocks of other blue chip companies like the Nigeria Breweries, Nestle, Zenith, GTB, Unilever, FBNH, Seplat have all gained significantly and boosted investors’ confidence. Positive earnings reported by these blue-chip companies have strengthened market fundamentals. Also, with treasury bills mostly selling at rates below the inflation rate, investors have been forced to gravitate towards the stock market in search of better yields.

The highest return rate on 91-day tenor has been around 12%, while 182 and 364 days tenor between 10% and 15%. Inflation rate started at about 15% at the beginning of the year before decelerating to 12.48% in April. Foreign investors’ sentiments have turned more bullish on Nigeria, and they are picking up deals even in Nigeria’s 2nd tier banks.

These foreign investors are looking for cheap assets that they can acquire to give them easy inroads into Africa’s largest market; most of those funds are going into equities. Also, fund managers who missed out in the Nigerian stock market rally of 2017 are rushing in to buy stocks, which are still relatively cheap.

Added to all these is the global surge in equity prices across the world that has contributed significantly to demand of stocks in emerging markets like Nigeria. Foreign investors’ appetite for cheap assets generally began in 2017 when Liberty Mutual Group, an American diversified global insurer and the fourth-largest property and casualty insurer in the United State, acquired about 70% of the equity of Unic Insurance Plc, even though the share price has been performing woefully.

Milost Global, a private equity firm headquartered in New York City with more than $25 billion in committed capital, expressed interest to invest $1 billion in one of Nigeria’s 2nd tier bank, Unity Bank. $250 million is to be invested immediately in the bank in exchange for a 30% equity stake. $750 million will then be invested over the next four years.

The investment was also reported to be a mix of equity and convertible bonds. The announcement was unexpected as the share price of the bank was a paltry 56 kobo and was even overvalued, considering that it had over ₦237 billion in negative retained earnings as at 2016. Milost came into prominence last year when it announced that it had acquired Primewater View, a Nigerian Real Estate firm for over $1 billion.

The company also reported that it signed a deal to inject about $350 million into Japaul, another stock that’s doing badly and announced plans to buy one or two Nigerian Banks. Overall, Milost has said that it plans to invest about ₦2.6 trillion in Nigeria.

The thirst for Nigeria’s market was ascertained when the NSE disclosed that Nigeria’s Foreign Portfolio Investment (FPI) increased by 59% in March to ₦132.21 billion; against the ₦83.22 billion recorded in February. Oando Plc and seven other companies outperformed stocks on the Nigerian Stock Exchange (NSE) in April to emerge as top performing equities in percentage terms.

Oando emerged as the best performing equity with a growth of 52.75 per cent to close at ₦9.15 per share as against ₦5.99 in March. Learn Africa came second with a growth of 39.18 per cent to close at N1.35, while ETI grew by 36 per cent to close at N20.10. AIICO Insurance improved by 16.13 per cent during the period, Nestle 15.87 per cent, Seplat grew by 15.04, Prestige Assurance 13.33 per cent and Unic Insurance appreciated by 11.11 per cent.

These gains are indicators of investors’ confidence in the equity in spite of the ongoing forensic audit initiated by the Securities and Exchange Commission (SEC). Investors in industrial goods and banking stocks were ahead of other investors. The NSE Industrial Goods Index recorded the highest quarter-on-quarter return of 10.96 per cent.

The NSE Banking Index followed with a return of 9.49 per cent. The NSE Insurance Index rallied average gain of 8.41 per cent. The NSE Oil and Gas Index appreciated by 4.90 per cent while the NSE Consumer Goods Index posted a modest return of 0.21 per cent.

The NSE 30 Index, which tracks the 30 most capitalized companies at the stock market, posted a threemonth return of 7.30 per cent. Impressive quarter one companies’ results, low company valuations, unrelenting increase in oil prices and lower inflation rate could shore up the market in the short term.

However, the sustenance of the current foreign exchange intervention regime and continued restoration of security in the Niger Delta region will be critical in ensuring the equities market maintains the current momentum for a long time.

Stocks market analysts have noted that the current bullish trend of the Nigerian equities market will depend on many global, domestic, regulatory and industrial factors. Also, as long as the political economy remains favorable, Foreign Portfolio Investment (FPI) inflows will not only continue to improve but also contribute to Nigeria’s economic growth.

Commenting on the bourse’s projection for 2018, Mr Onyema said that political activities and currency movements would affect the market growth. “Indeed, to some extent, political activities and currency movements will have some effect on the market, but we expect that such impacts will be short lived and the performance of the underlying business activities will ultimately determine market performance,’’ he explained.

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Nigeria’s economy to experience higher growth if liquidity can be unlocked

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“Unlocking Liquidity will restore growth and stability for Nigeria,” Ayo Teriba, Economist and CEO, Economic Associates.

If Nigeria is to achieve sustainable economic growth and stability in its economy, unlocking liquidity must be given top priority.

Dr. Ayo Teriba, an economist and CEO, Economic Associates, made explained this point at the Q2, 2019 one-day quarterly conference on Nigeria’s economic outlook in Lagos.

He decried the fact that Nigeria was at the low end of the liquidity ladder in Africa, arguing that the situation had to be addressed urgently.

Liquidity he pointed out was critical to increasing the nation’s external reserves that serve as a buffer against shocks in commodity prices.

One of the ways he believed Nigeria could improve its liquidity, is by attracting capital inflows, which was important considering the revenue challenges of the government.

In the evolving race for global liquidity, Teriba made a strong case for the alignment of policies to strengthen liquidity.

According to him, “The Federal Government is focused on growth, while the Central Bank of Nigeria is concerned about stability. There is no express concern about liquidity”.

He was of the view that liquid markets are about making sure that there are buffers against shocks, and for Nigeria, having more capital inflows was important than outflows.

Speaking further Teriba identified the various options for unlocking liquidity in the economy, which include;

Privatization: Which implies partially selling its equity across all State-Owned Enterprises, SOEs to retain a minority stake. (Brownfield Foreign Direct Investment Inflow)

Liberalization: This implies the development of idle land and building and unbundled infrastructure projects. (Greenfield Foreign Direct Investment Inflow).

Commercialization: Getting rental income from wholesale leasing of idle lands and buildings.

Securitization: This suggests securitization of future income streams from all financial and non-financial assets.

Teriba called for a strategic reform of revenue generation in the federation and across all tiers of government.

The economist stressed the need for Nigeria to move beyond exports, taxes and debts towards rental income and equity. He stressed that Nigeria had a lot to gain from securitizing its assets.

Some of the assets he identified for the government to consider are the following;

Corporate Assets: Which are government wholly-owned or majority equity holdings in State-Owned Enterprises, SOEs.

Financial Assets: Which represent the government’s minority equity holdings in Joint Ventures and other companies

Tangible Non-Financial Assets: Taking the steps of commercializing and securitizing idle lands and buildings, amongst other assets.

Giving further insight on capital flows, he identified foreign direct investment, FDI and Remittances as the major types that Nigeria should utilize.

He gave an example of Saudi Arabia that has developed a privatization plan worth $ 100bn, which will bolster the liquidity of the Gulf nation.

Dr. Teriba also referenced the Liberalization and Privatization plans of India, that has positioned the densely populated nation, as one of the leaders in FDI.

The CEO of Economic Associates was of the strong view that Nigeria needs a robust strategy to attract more foreign investments to compensate for lost export revenues.

In an interactive session with participants, he called on Nigeria to explore how it can leverage the Diaspora remittances, noting Africa was one region that had a challenging environment for remittances. Currently has a foreign reserve of approximately $45bn which can triple within a year, if it prioritizes unlocking liquidity through the various capital inflow options available.

Coming into 2019, considering various views on FX stability and expected calmness in the polity post-election had revealed an improvement in economic growth over the year. Notably, growth was projected to be anchored on stronger performance in the non-oil sector as the lower investment in the oil sector– save for the addition of the Egina oil field – amidst shut-ins at key oil exporting pipelines will result in slower growth in the oil sector and by extension a much slower contribution to overall GDP. Notwithstanding, the optimism of stronger contribution from the non-oil sector, has boosted the impact of the innovative programmes by key industry players in the ICT on the overall subsector growth. Reflecting the improved activity in the ICT subsector in Q1 19, coupled with recovery in both the Agriculture and manufacturing sectors, economists expect a much robust growth in GDP over 2019 by 20bps to 2.2% YoY (FY 18: 1.9% YoY).

Starting with the harbinger of growth, some economists retain their surmise on most sub-sectors in the nonoil territory with slight changes to services – driving a nonoil sector growth of 1.8% YoY (FY 18: 2.1% YoY). While some made an upward adjustment to the growth assumption for ICT subsector, the high base of growth in the prior year, the lull in the real estate and slower growth of credit creation in financial services is expected to constrain the rate of growth for the overall services sub-sector. In the ICT subsector, the upward projection to the assumption emanated largely from the now telling impact of the innovative customer acquisition programs. For financial services, notwithstanding the recent policies aimed at enhancing private sector lending – there are not much traction, as banks remain cautious in growing their risk assets. Lastly, there’s a believe that activities in real estate sector would remain muted given its oversupplied state. That said, activities in services is expected to expand modestly by 1.7% YoY (FY 18: 3% YoY).

On Agriculture, there is an optimistic view of a recovery in crop production due to favorable weather and government intervention aimed at curbing ongoing conflict in the northern region. On the government intervention, the RUGA (rural grazing area) settlement program was recently proposed, which requires each state to provide lands for the herders to grow their cattle. Though the program was suspended due to kickbacks from various states, there are positivity on some form of concession by the State government given the critical nature of the sector. Further buttressing the point is the ongoing discussions on a peace pact between the Zamfara state government and armed bandits in a bid to improve farming activities in the state. That said, economists expect the sector to grow by 3.2% YoY (FY 18: 2.3% YoY).  Elsewhere, while the general elections slowed activities in the manufacturing sector, some economic pundits see some traction in the sector beyond Q1 2019. Further upside would be payment of the minimum wage approved at the start of the year and successful implementation of the presidential order to clear the Apapa gridlock which had been a strain on producers over the last two years due to difficulty in transporting raw materials. That said the manufacturing sector is expected to grow by 2.13% YoY.

In the oil sector, it was highlighted at the start of the year that the plausible risk to crude oil production would be the resumption of militant attacks during the first quarter of 2019 should the electoral process get violent. With militant attacks out of sight, there is no impending risk to overall production asides minor pipeline leakages. Asides that, additional 200,000bpd capacity from Egina oilfield which resumed operations in January further supports the stance of increased production. For context, while NNPC is yet to provide any data on Nigeria’s oil production this year, the channel checks with external sources reveals that actual production touched 2mbpd (condensates inclusive) in April. That said, it is expected average oil production to print at 2.04mbpd – 6.4% higher than the prior year. Thus some economists suggest that the Nigerian economy will experience a 2019 growth estimate of 2.2% as against an initial prediction of 2% as a result of improvement in both the oil and non-oil sector.

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