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Nigerian equity market in the first nine months of 2020 12 Oct 2020

Oscar Onyema, CEO, Nigerian Stock Exchange

During his presentation of a review of the market performance in 2019 and the outlook for this year on January 13, 2020, Chief Executive Officer of the Nigerian Stock Exchange (NSE), Oscar Onyema, said the negative performance of the country's capital market last year reflected the weak performance of the larger economy. The equities market lost 14.6% in 2019 but opened in 2020 on a positive note with the main market index, All Share Index (ASI), recording a 10.4% improvement as of the day of Onyema's presentation.

However, the market's growth momentum at the beginning of the year could not be sustained as soon as the coronavirus outbreak in China became a global pandemic. In the wake of the pandemic, capital imports to Nigeria fell by 77.88% to $1.29 billion in the second quarter of 2020, compared to the preceding quarter. The National Bureau of Statistics (NBS) said the leading contributor to the precipitous decline in capital importation was portfolio investment – which includes equities, bonds, and money market instruments.  

Indeed, huge stock market losses were recorded at different periods during the first and second quarters of this year, as Covid-19 turned out to be a double whammy of health and economic crisis. But following the easing of travel and quarantine restrictions, the Nigerian equities market somewhat appeared to be on a recovery in Q3.   

The ASI, which had fallen 8.8% by mid-year, appreciated by 9.6% in Q3 to close at 26,831.76 points at the end of September. Investors gained N1.3 trillion. However, the recovery was not strong enough to completely wipe off the losses of the preceding two quarters. The benchmark stock index of the NSE recorded a decline of 0.04% between January and September; but the market capitalization increased by 8.2% in the period to close at N14.03 trillion.

To be sure, these data certainly belie the divergent fortunes of the sectoral and other sub-indexes of the NSE. The hardest hit in the first nine months of this year was the NSE Premium Index, which captures the performance of companies listed on the Premium Board. There are only eight companies on the board, including Dangote Cement, MTN Nigeria Communications, Access Bank and Seplat Petroleum Development Company. The others are Zenith Bank Plc, Lafarge Africa Plc, United Bank for Africa Plc and FBN Holdings Plc. According to the NSE, these companies are industry leaders that have met its most stringent listing criteria on corporate governance, capitalisation and liquidity.

The premium equity index depreciated by 44.2% in Q3 alone and 44% in the last nine months. The NSE 30 Index – which tracks the top 30 companies in terms of market cap and liquidity – fell by 2.5% in the first nine-month period of 2020. But in Q3 when Covid-19 restrictions were significantly eased and the stocks began to recover losses, the index recorded a gain of 9.2%.

The Alternative Securities Market's (ASeM) equity index was yet to start recovering its losses. The index depreciated by 1.8% in the last three months. Over the last nine-month period, it declined by 0.9%.

Among NSE’s five sectoral indices of banking, insurance, oil and gas, consumer goods and the sub-index for the industrial sector, the worst hit was oil and gas. The index lost 25.7% of its value between January and September. The second-highest losing sub-index in the review period was Consumer Goods Index, followed by Banking Index, whose values dropped by 23.5% and 13%, respectively.  

Amid general market decline, the Insurance Index and Industrial Goods Index both delivered resilient performance in the last nine months, gaining 10.3% and 11%, respectively. A review of their performances in Q3 also shows gains, albeit in lower figures compared to their nine-month performance.  

As a mark of its recovery, the Banking Index recorded a spurt in gains of 10% in Q3, which also saw a recovery (2.7% gain) for the Consumer Goods Index. The strong performance of the banking and insurance equity indexes in Q3 follows the NBS' report in August that financial and insurance services recorded the fastest sectoral growth in Q2. The sector expanded at a rate of 18.49%.

The impressive performance of the sub-sector was, however, muted in terms of its contribution to gross domestic product (GDP), which contracted by 6.10% in Q2. This contribution of financial and insurance services to GDP was diminutive at 4%. The figure is not unusual as the sector contributed even less (3.17%) to GDP in Q1 2020 and 2.93% in 2019.  

In comparison, sectors with higher contribution to GDP such as agriculture (24.65%), manufacturing (8.82%) and trade (14.28%) either recorded weak output growth or contractions in Q2. In fact, the trade sector, which has been in recession since Q3 of 2019, contracted much further by 16.59% in Q2 of 2020 amid the outbreak of Covid-19. The pandemic has worsened economic conditions in Nigeria, a country that was already battling with high unemployment, rising inflation, poverty and low GDP growth rate since the 2016 recession.

It was no irony that although 2019 was the year Nigeria recorded its highest GDP growth rate (2.3%) in four years, the country recorded one of the worst equity market performances in Africa. Nigeria's economic growth averaged 1.22% in the five-year period (2015-2019), with GDP growing below the population growth rate of 2.6%. This long period of weak economic growth coupled with rising poverty has not provided a conducive environment in which companies can increase profitability, thereby enabling their stocks to become more attractive to investors.

Like Nigeria, South Africa was also facing dwindling economic growth before the Covid-19 pandemic. But unlike Nigeria, South Africa’s equity valuations were more impressive last year partly because the country has more developed financial and capital markets than its West African counterpart. The Johannesburg Stock Exchange's all share index gained 8% in 2019, making the JSE one of the best performing African stock exchanges last year. Unfortunately, Covid-19 has broken the resilience of the JSE’s equity market, which has lost 4.9% in the last nine months. South Africa has the highest number of Covid-19 cases and deaths in Africa.

For a sustained equity price rally, there needs to be a continuous improvement in the real economy. The foreign exchange market also needs to stabilize and become more liquid. These will support corporate fortunes and attract the interest of international investors.  

The Central Bank of Nigeria (CBN) imposed capital controls in 2015 when the country experienced severe dollar shortages following the fall in the prices of crude oil. The apex bank subsequently eased some controls as foreign reserves started to rise in 2017. But volatility in the FX market and dollar scarcity in the wake of Covid-19 led to new restrictions, causing an FX demand backlog that was close to the 2016 crisis levels of $7 billion as of June 2020. As a result, the country was said to be losing investor confidence.

But since last month, the CBN has significantly increased FX liquidity in the market, a development that should improve market sentiment. Better-than-expected corporate results in Q3 would also help in improving the benchmark index of the NSE in Q4, thereby ending the year on a positive note.