2020: Investors dump money market instruments, turn to equities market


The Nigerian Stock Exchange (NSE) in 2020 surprised investors’ expectation, breaking historical record despite COVID-19 lockdown. Kayode Tokede writes on what drives the equities market growth and its sustainability. 

The Nigerian Stock Exchange (NSE) equities market segment soared in 2020, following both foreign and High Network Investors decision to dump the money market and trade in fundamental stocks.

Also, key equities market indices hit numerous record highs as stocks posted their best annual return despite the negative impact of the COVID-19 on both global and local businesses.

This year witnessed historically volatile global equities markets and the fastest equities crash since the 2008/2009 crisis as investors were taking profit over global economic uncertainties.

The combination of expansionary Central Bank of Nigeria’s (CBN) monetary and fiscal policy stances helped mitigate the initial shock of the pandemic, and the consequent liquidity surfeit led to a strong equities market rebound despite the lockdown as the management of NSE introduced remote trading.

As at December 24, 2020, the NSE All-Share Index recorded a year-to-date growth of 44.55 per cent, making Nigerian stocks are among the best performing globally.

The market coming from a negative return of 14.60 per cent in 2019, ended the year 2020 on a strong positive return as the All-Share Index (ASI) which opened 26,842.07 basis points at the beginning of the year closed on December 24, 2020 at 38,800.01 basis points, posting a positive year-to-date return of 44.55 per cent.

Consequently, market capitalisation for the year as at December 24, 2020 gained by N7.321 trillion to N20.279 trillion from N12.958 trillion at which it opened trading for the year.

Performance across the major sectoral indices was positive during the period under review, with the NSE Industrial Goods index leading with 72.88 per cent gain. NSE Premium index followed with a gain of 60.41 per cent, while NSE Insurance index up by 48.04 per cent.

NSE Lotus II, NSE 30, NSE Pension and NSE Banking indices closed the year in a positive territory with a gain of 46.14 per cent, 33.15 per cent, 30.82 per cent and 10.76 per cent, respectively.

On the other hand, NSE Oil and Gas in the period under review declined by 14.01 per cent, while NSE Consumer Goods shed 2.81 per cent.

What brings about the growth?

At the start of the year, capital market analysts stated that fundamentals were not strong enough to drive a natural correction in the equities market but that the CBN’s policy directives, which caused fixed income yields to decline precipitously, would offer some respite to the domestic bourse.

This played out in January as the opportunity for a dividend yield investment strategy presented itself. However, this could not be sustained over the rest of first quarter (Q1) on weak foreign participation in the market due to weak macro fundamentals and fears concerning a possible devaluation, weak domestic participation, and the outbreak of the COVID-19 virus.

Since hitting an eight-year low in April, the market unexpectedly rebounded strongly by 44.55 per cent, as at December 24, 2020. The deliberate actions by the fiscal and monetary authorities to drive interest rates down significantly were the primary drivers of the gains.

Local investors, who had over N5.0 trillion in Open Market Operation (OMO) maturities to deploy, were left with no choice but to chase positive real returns in the equities market. Following the Q1 selloffs, the equities market provided a massive opportunity for bargain hunting with many stocks trading at huge discounts and offering higher dividend yields than fixed income.

Notably, yields on fixed income instruments became technically un-investible, short term treasuries traded at sub-one per cent levels while long tenor bonds traded below seven per cent.

On fund flows, domestic investors had brought in N159.81 billion into the equities market as of September 2020, compared to N94.03 billion over the whole of 2019. Conversely, foreign investors exited the market en-masse as FX illiquidity issues persisted.

Data from the NSE showed that flows from foreign investors were negative in all months of 2020, save for May, when trapped investors re-invested dividends. Overall, foreign investor net outflows have totalled N159.62 billion YTD, a record high, with participation, compared to domestic investors falling to a record low.

Analysts comment on 2020 equities market performance

On 2020 market review, analysts at Cordros Securities Limited stated that “The gains this year were led by what we tagged the ‘best COVID-19 defensives’, the Telco stocks. Local investors piled into MTN Nigeria Communication (MTNN), whose earnings were resilient and provided a significant price upside. In comparison, foreign investors flocked to the dual-listed Airtel Africa as an alternative means to repatriate funds.

“Industrial Goods stocks, mainly the big three Cement firms, Dangote Cement, BUA Cement and Lafarge Africa also lent a hand. Investors increasingly opted for these ‘cyclical’ companies, whose earnings growth are tied to the economic performance and those whose earnings performed better than initially expected as the government eased lockdown measures.”

They further stated that “Investors also looked to the Banking stocks, particularly Guaranty Trust Bank and Zenith Bank, as they offered best-in-class dividend yields and recorded better than expected earnings despite the effects of the pandemic.

“Oil & Gas stocks declined on average, driven by sector heavyweight SEPLAT Petroleum Development Company (SEPLAT), whose earnings suffered from the oil price crash. However, reforms in the downstream subsector offered a boost to oil marketers’ stocks, like Mobil Nigeria and Total Nigeria both surged in the year as the removal of the PMS retail price cap allowed the companies to enjoy margin expansions.”

United Capital Plc said that “The spread of the COVID-19 disease across the world triggered unanticipated global financial market volatility and Nigeria was not left out.

“FPIs and local investors flew to safety amid the collapse in oil prices and currency adjustments. Investors repriced the risk on naira assets, driving the average yield on OMO bills and domestic bonds from 13.1 per cent and 10.8 per cent at the end of December, 2019, to 15.1 per cent and 11.9 per cent respectively as at the end of March, 2020. Also, the stock market tumbled by more than 20.0 per cent in Q1, 2020.

“However, in Q2, 2020, the financial market rebounded sharply, as the yield curve moderated amid optimism in the global and domestic market economy.”

The vice president, Highcap Securities Limited, Mr David Adnori stated that the equities market started poorly at the beginning of the year but recovered relatively at a point in the year, saying that the equities market gained as a result of the fiscal, monetary policies of the federal government and the Central Bank of Nigeria.

The CEO, Enterprise Stockbrokers Plc, Rotimi Fakayejo said, equities market performance in 2020 is above expectation, stressing that stakeholders in the equities market had written off the market this year.

According to him, the performance of the equities market is above expectation as everybody was expectation negative performance with the way economy was before the lockdown and post-lockdown of COVID-19.

“The issue of repatriation of foreign exchange makes investment in the equities market. The reform in the foreign exchange market contributed to investors staying away from the equities market.  The quarterly results by listed banks, others revived the equities market this year.”

Speaking on roles of policies makers in the equities market performance, he said, “The fundamentals of listed companies have sustained the positive performance of the market in 2020. The local investors and high network investors to a greater extent drive the equities market.”