Why the [Nigerian] Stock Market Could Hold at these Levels

By Chinedu Okoye 


The stock market has gained over 130% in the last two years rewarding investors with handsome gains, and one has to think if at this point we could see a mean reversion, or perhaps a market correction. This concern is particularly strong when you add to the fact that the rally hasn't been followed by an exponential economic growth.

We give four reasons below why we think the stock market could hold at these levels, with no major correction in sight.

 

  1. Banking Recapitalisation: With the CBN mandate to recapitlaize banks to strengthen the financial sector means banks are attracting long-term investors as well as shorterm holders. Recapitalisation forces banks to issue new shares or retain earnings, both of which increase transparency and investor confidence. Giving that the Cash Reserve Ratio (CRR) is still at the 50% level for commercial banks, the risks levels are relatively mild, and so these stocks seem not overpriced but adequately priced, healthy and poised for future gains.
  1. Naira Exchange Rate: With the Naira appearing to have reached a near-term equilibrium at ₦1500 – ₦1600/$1, Nigerian equities remain relatively cheap in USD terms, and this could sustain interest from foreign and diaspora investors.
  1. Expected Macroeconomic Stability: The exchange rate stabilizing and inflations rate cooling could see the central bank reduce benchmark rates [it Monetary Policy Rate] and hence borrowing costs for listed companies, and this could impact bottom lines marginally, setting up companies for producing consistent stable returns period after period.
  1. Potential new heavy listings like Dangote Refineries would also be bullish for the markets. This is cause such listings increase market capitalization and sectoral diversification, and could attract broader institutional interest.

 

While markets are never without risks, the combination of financial sector reforms, FX stability, potential monetary easing –should the disinflationary trend continue– and pipeline listings provides a solid floor for the NGX All Share Index in the medium term.

Our expectations is that the All Share Index holds at a baseline of ₦125,000, and go higher in the next 18 months. A stalled increase would be the market signal for an over bought scenario rather than a massive decline. Declines are not ruled out, but massive corrections are. 

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