June 20, (THEWILL)- SAM DIALA interrogates the myth surrounding the emergence of Nigeria as the world’s best performing Stock Exchange in 2020 amid the COVID-19 pandemic, economic recession and other negative fundamentals
Many observers are still perplexed over the unusually bullish trend that earned Nigeria the Best Performing Stock Exchange in the World ranking in 2020 – a year that businesses experienced the worst operating environment.
By conventional wisdom, the stock market is a barometer of the economy. As an important component of a country’s economic and financial set-up, stock markets reflect and mirror the conditions of an economy at a given time. They are termed “barometer” because changes in the stock market index are indicative of the concurrent changes in the economy.
Amid the COVID-19 pandemic, which has spread human suffering and destabilised the global economy in the worst dimension in 100 years, Nigeria emerged the best performing stock exchange in the world. Exceptionally, the country beat the Group of 7 (G-7) nations which control more than 50 per cent of the global net wealth and determines the political heartbeat of the entire world.
Consider the London Stock Exchange (England), Frankfurt Stock Exchange (Germany), NYSE American (the USA), Tokyo Stock Exchange (Japan), Toronto Stock Exchange (Canada) and the others in that higher-ranking category, some recording over $30 trillion market capitalisation. Nigeria beat them all “hands down”.
Besides the rampaging COVID-19, Nigeria was deep in recession at the time – the worst in 25 years. The country also wore (and still wears) the toga of the world’s headquarters of the poorest people. According to the World Bank, 80 percent of the world’s extremely poor people reside in Africa’s largest economy. The prolonged land border closure and the inauspicious #EndSARS protest did not end with good tidings for the economy.
Trapped in such a frightening socio-economic scenario, therefore, for Nigeria to emerge the best performing stock exchange in the world deserves some interrogation. At least, it will assist in enlightening the minds of the ‘uninitiated’ who are battling with the paradox and, also, watching the complex interplay of the stock market fundamentals from the sidelines.
Thriving in Anomalies?
The year 2020 has been described as one of anomalies. Perhaps, the most perplexing aspect of 2020 anomalies was the mysterious resurgence of the global stock market. Interestingly, the Nigerian Stock Exchange (NSE), now NGX Limited, led the resurgence in global stock markets, outperforming other markets around the world. Out of 80 other stock market indices on Bloomberg tracking global stocks in different countries around the world, the NSE All-Share Index (NSE Index) was the best performing market with a year-to-date return of around 44.55 per cent – the best return in three years.
The nation’s inflation rate as of December 2020 was 15.75 per cent from 12.13 per cent in January of the same year (a rise of 362 basis points). The GDP rate grew by 0.11 per cent as the nation wriggled out of recession that gripped it in Q2 2020 with a negative growth of -6.1 percent.
Unemployment rate reached an all-time high of 27.1 per cent in Q2 2020 amid COVID-19-induced slump in oil price in the international market. Interest rate (MPR) was 11.5 per cent, while actual bank rates hovered around 20 per cent and over. GDP per capita dropped from $2,341 in December 2019 to $2,073, a decline of 11.44 per cent. Notwithstanding its status as Africa’s largest economy ($447 billion), Nigeria was not among the IMF-ranked 10 fastest growing economies in the continent led by Ghana.
The high performance ignited the NSE market-wide circuit breaker on November 12, 2020 at 12:55 pm, the first in four years. The NSE circuit breakers are triggered during periods of extraordinary volatility in the equities market in order to maintain an orderly market and to allow liquidity to re-aggregate. On that date, the circuit breaker kicked in when NSE ASI rose beyond the set threshold of 5 per cent, triggering a 30-minute trading halt of all stocks. That is to show the unexpectedly bullish performance of the market at the time.
Again, more than N435 billion worth of unsuccessful transactions were recorded in the Nigerian T-Bills auction conducted by the CBN on Wednesday, November 11, 2020 on behalf of the Federal Government. The trend of limited attractive instruments had forced investors to bid as low as 1 per cent each for the 92-day and 182-day bills and 1.9 per cent for the longer 364-day maturities. Rates on T-Bills plunged further as the CBN settled its stop-rates at 0.04 percent, 0.15 percent and 0.3 percent for the 91-day, 182-day and 364-day maturities respectively, as against 0.34 percent, 0.5 percent and 0.9 percent in the previous stop rates auction.
Why Miraculous Surge?
Several reasons account for Nigeria’s standing like an oasis in the desert during the COVID-19 ravaged year among global stock markets. The first was the sudden bullish trend created by the exodus of investors from the low interest environment of the fixed income market. The Federal Government had ‘decreed’ low-yield returns for the T-Bills and Bonds instruments. This, in its wisdom, was to discourage the influx of investors to the safe haven of the fixed income market incubating idle assets.
The government believed it could stimulate the real sector by ‘starving’ the fixed income market of funds so as to boost the equity market where long-term funds exist. The resultant and sustained CBN dovish position spurred a rally in the equity market, which provided a haven for investors fleeing low T-Bill and Bond yields. So, the equity market witnessed an influx of investors on pilgrimage who could also be described as bargain hunters in exile.
The second reason: The low-yield interest rate environment ignited an increase in stocks’ valuation, leading to a good number of stocks recording price gains compared to their pre-rally status. This included stocks outside the bellwether group, such as insurance, which used to flood the dormant equities and ‘kobo’ stock league. Not less than 30 stocks were identified among those that rewarded investors with impressive returns year-to-date; occasioned by the “induced” rally in the stock market. In other words, many dead stocks resurrected and injected more strength into the raging bull at a time many expected the bear to dominate the stage.
The third factor that led to the stock market quantum leap in 2020 was the palpable ‘frustration’ of foreign investors who could not access foreign exchange (forex) to repatriate their profits or import raw materials. They “had no better choice than to reinvest in the stock market,” said Uche Uwaleke, professor of Capital Market at Nasarawa State University. Evidently, the biting forex scarcity discouraged investments even in the real sector.
Reports showed that manufacturers and other businesses relied more on the unofficial forex market to fund their operations, which ate into their earnings. Some manufacturers, who benefited from the CBN COVID-19 intervention funds, lamented over their inability to source forex to bring in the required machinery for their operations.
The fourth reason for the dominance of the raging bull on the stage was the effects of the controversial 15-month closure of the country’s land borders with neighbouring countries. The development had its toll on many manufacturing companies as they could not export their products during the period. Among them was Cadbury Nigeria, which reported a 14.4 percent slump in export sales revenue to N3.3 billion in nine months in 2020 due to the COVID-19 pandemic and the closure of the borders.
Aari Steel, an exporter of steel products, stopped selling to West and Central Africa as exporting by sea ultimately proved expensive. PZ Cussons and Nestle Nigeria reportedly spent weeks at sea, while exporting their products to the West and Central African markets. The bold step eventually turned suicidal resulting in loss of forex earnings, dwindling revenue and contraction of operations. Many workers had to be laid off and the money saved from the payment of their salaries was moved to the stock market, according to industry sources.
The other factor was the reported preferential treatment extended to Dangote Cement and Bua Cement to export their products through the land while the border closure was still in force. This controversial treatment impacted positively on the market. How? Their activities obeyed the fundamental ‘ice’ law of economic growth: Investment, Consumption and Export (ICE), which the two companies’ activities involve. They earned huge money during the period. With a combined market capitalisation of N6.27 trillion (N3.74 trillion and N2.53 trillion), or 31 percent of total market capitalisation of N20.23 trillion as of March 12, 2020, Dangote and Bua naturally boosted the stock market.
Recall that Dangote Cement executed a buy-back (of 85.2 million shares) on the NSE in December 2020. The deal, aimed to repurchase 10 per cent of the company’s 17.04 billion issued shares, led to a 9.98 per cent rise in its share price to N230.4. The shares, which had hit bottom in April, rose to an almost two-year high on news of the share buyback, according to Reuters. One can philosophically say, when Dangote sneezes, the market catches cold.
Finally, as the earning season resonated towards the end of the year, bargain hunters ‘invaded’ the equity market to take positions. It preceded the dividend earning season of the first quarter of 2021 when quoted companies reward their shareholders with dividends or capital appreciation allotments. This equally accounted for the unusually bullish force that launched Nigeria on the global spotlight in 2020.
Underlying Implications
The historic development in Nigeria’s financial services industry points to one fact: Nigeria runs a public sector-driven economy which, sadly, crowds out the private sector – the engine of economic development. The ‘growth’ in the equity market was the outcome of ‘Caesar’s’ command. It was an uncommon phenomenon not expected to assume an immutable stance.
Conventionally, capital does not obey the command of dictatorship. You do not decree the route that capital should stick to. Naturally, money works for whoever employs it the efficient way. When you decree on the route that capital must follow, be sure that it will ultimately make a detour to find the suitable course.
According to Benjamin Disraell, there can be no economy where there is no efficiency. For the government to borrow at 0.1 percent in T-Bills and Bond and ‘push’ investors to the equity market smacks of inefficiency; it mirrors no wealth-creating fundamentals in the first place.
Institutional investors, such as Pension Fund Administrators, who are the major ‘movers and shakers’ of the stock market rally that created the “irrational resurgence” of the equity market in 2020, will naturally ‘amend their ways’. They have now staged a vigorous comeback to the fixed income market with the excitement of captives returning from exile.
Enters Moment of Reality
Stakeholders had predicted that a bust of the bullish stock market would occur in 2021, beginning from Q1. This is because the 2020 rally was not a creation of strong fundamentals. In the government’s unbridled bid for borrowing, experts predict early reversal in the government’s low interest policy. This has shown in both the T-Bill and Bond sale programmes published earlier in 2021. “Government is already returning to the fixed income market for borrowing; so, we expect a bust any time soon,” said Mr Paul Uzum, stockbroker and Vice President at Planet Capital.
The Doyen of Nigerian Stockbrokers and Non-Executive Director at UIDC Securities Limited, Mr Sam Ndata, described the unusual market rally of 2020 as puzzling and one not founded on strong fundamentals. “When has strong fundamentals supported market performance in recent times – is it PE (price earning) ratios or market hear-say, or what? You hardly use fundamentals to analyse the market these days,” Ndata said, suggesting that the 2020 stock market rally was a hanging object.
“What is not in doubt is that given the bullish behaviour of the stock market, especially in Q4 of 2020, which can be likened to a tide that lifted some stocks beyond their intrinsic values, the stock market will pull back [decline] this year. I expect some sort of market correction in 2021 since the conditions that pushed up stock prices last year (especially low interest rate environment) are likely to reverse,” Prof Uwaleke said in a note to THEWILL.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
