As Nigeria continues to face economic issues, the equity market has continued to fall, with investors’ wealth falling by a staggering N1.69 trillion in just three months.
An examination of market activity from June to August 2022 revealed that the stock market depreciated by N283 billion in market capitalisation in August, while it increased by N772 billion in July, as investors shifted to the fixed income market, which offers low-risk investment and modest yields above the inflation rate.
In June, the stock market’s market value fell by N632.23 billion to N27.94 trillion.
Tracking the overall market movement of all listed shares on Nigerian Exchange Limited (NGX), including those on the Growth Board, the stock market fell 1.06% in August to close at 49,836.51 basis points despite investors’ sentiments.
The NGX All-Share Index, a measure of the performance of the stock market, declined by 2.79% to close at 50,370.25 basis points in June 2022 and by 2.79% to close at 51,817.59 basis points in July.
The advent of new COVID-19 pandemic strains was the main worry for global economic growth at the beginning of the year. Growth was further constrained by the conflict between Russia and Ukraine, which created new supply limitations.
Between June and August 2022, the stock market struggled with an increase in inflation (19.64% as of July 2022).
Foreign investors also left the country as a result of the Central Bank of Nigeria’s (CBN) hike in its Monetary Policy Rate (MPR) to 14% and a lack of foreign currency.
This is supported by the fact that, from N124.75 billion reported in the first seven months of 2021, the outflow of foreign investors on the NGX floor increased by 11.4% Year-on-Year (YoY) to N138.97 billion in the first seven months of 2022.
Profit-taking by domestic and foreign investors in stocks of Dangote Cement Plc, BUA Cement Plc, Nestle Nigeria Plc, and Zenith Bank Plc, among others, had a negative impact on the NGX indexes.
For instance, Dangote Cement’s share price fell by 11.6% to N245 as of August 2022 from N277.00 when it first began trading, dragging the NGX Industrial index down to 1,777.14 basis points from 2,194.24 basis points.
BUA Cement likewise lost value, falling from N74.25 when it first began trading in June to N52.00 per share as of the market’s close in August.
When the stock market opened for trading in June, the Banking Index was at 425.71 basis points. By August, it had decreased by almost 9% to 387.41 basis points.
Profit-taking caused Zenith Bank’s stock price to decline from N23.45 when it first began trading in June to N21.90 as of August, and Guaranty Trust Holding Company (GTCO) Plc’s share price fell from N22.55 to N19.85 as of August.
In order to lower the NGX Consumer Goods Index by 7.85 percent to 600.56 as of August 31, 2022 from 651.73 basis points it closed for trading in May 2022, Nestle Nigeria depreciated to N1,350 per share as of August from N1,400 per share.
The NGX Oil & Gas sector also lost value due to profit-taking, falling from 547.57 basis points when it first began trading in June 2022 to 532.15 basis points as of August.
Thus, the stock market continued its upward trend in its year-to-date performance, rising 16.67% in the first eight months of 2022, supported by a few fundamental stocks with strong corporate results.
The increase in interest rates and Nigeria’s inflation rate, which has risen to its highest level in more than 16 years, according to capital market specialists, are reducing equity returns while improving the outlook for the fixed income market.
Fixed income instruments continue to be more appealing than stocks due to Nigeria’s high interest rate environment, which aims to reduce inflation.
According to Mr. David Adonri, vice president of Highcap Securities Limited, in an interview with THISDAY, the stock market’s performance started to decline when the CBN’s Monetary Policy Committee (MPC) raised the interest rate to 14%.
He pointed out that while investors shifted to fixed income markets, other macroeconomic variables, such as the rate of inflation and the lack of available foreign exchange, also decreased demand for equities.
According to him, “The fundamentals of foreign and domestic macroeconomic indicators in three months have impacted negatively on the stock market.”
On the stock market performance in September, he explained that,
Situation may be the same with current events in global and domestic economy. The Russia/Ukraine war is one of them and the current happening in China regarding power blackouts is causing global anxiety among investors. People are afraid that it can cause recession in China and it can increase global inflation and Nigeria is vulnerable to such. Mind you, we have the 2023 general election where politicians are commencing campaigns from September and we are already experiencing foreign currency scarcity. We are in for a serious challenge in the stock market going forward in 2022.”
Reacting, the CEO, Wyoming Capital & Partners, Mr. Tajudeen Olayinka explained that, “In August 2022, the equity market reacted strongly negatively to the decision of MPC to hike MPR in quick succession, currently at 14%, in response to rising domestic inflation, which printed a 17-year high of 19.64% in July, 2022.
“This development made the securities market to be so unsettled, as it put the equity market in a prolonged repricing mode, which saw some investors harvesting early profit and some others staying away from the market completely, a terrible situation that forced liquidity to dry up so quickly.
This was the reason for poor performance in August, in spite of impressive performance by some listed companies. Market might witness a moderate repeat performance of what we saw in August, in the month of September 2022, except inflation number moderates in August, 2022.
“Given that prices are low generally, some traditional investors might begin to stage a comeback to the market on a more cautionary basis, to take advantage of short-term price movement. All the same, I see a bullish long-term equity market.”
Mr. Wole Adeyeye, an analyst at PAC Holdings, claims that some investors moved from the stock market to the fixed-income market in an effort to take advantage of high returns, spurred by the recent increase in policy rate. Because of the impending general elections, the depreciating local currency, and the general unrest in the nation, overseas investors also avoided the Nigerian stock market.
He stated that given the anticipated excellent yield in the fixed-income market, the trend may very well continue in September.