Nigerian Stock Market Rallies the Most as Investors look for Yields
Nigerian stocks surged by the most in more than five years, extending their rally to a 12th day, as meager local interest rates sent traders on a hunt for yields.
The Nigerian Stock Exchange All Share Index climbed 4.9% in Lagos, the sharpest gain since April 2015. The benchmark has soared 13% in the past month, more than any of the other 93 major global gauges tracked by Bloomberg, and is also the best-performing market in the world Tuesday. It’s on the longest winning run since July 2017.
Local investors have flocked to the stock market in search for returns as yields on government debt dropped after a surprise September rate cut aimed at stimulating the economy in Africa’s largest oil producer. Traders are homing in on Nigerian companies they expect will best overcome the onslaught of Covid-19 and be able to distribute dividends to shareholders.
“The low yield environment has directed some local institutional investors’ participation in the market, further aided by the relatively good corporate results and attractive valuations from some companies,” Lilian Olubi, chief executive officer of EFG Hermes Nigeria, said by email.
Market giant Dangote Cement Plc, which climbed 9.9%, MTN Nigerian Communications Plc, up 5.7%, and Zenith Bank Plc, which gained 9.5%, were the three biggest contributors to Tuesday’s advance.
The gains over the past month have been limited to about a third of the benchmark index’s 153 members. Gbolahan Ologunro, an analyst at CSL Stockbrokers, said the fragile state of the economy has caused investors to focus on stocks that have demonstrated resilience.
“That is why the rally is not broad-based — few names across sectors have benefited from the rally,” said Ologunro. This “trend is different from what is expected whenever the market is bullish,” he said.
Fund managers have made the most of a bond rally this year driven by dovish central bank policy, said Omotola Abimbola of Chapel Hill Denham, but there is a sense that this trade is reaching its peak and the next asset to target is equities.
“Yields are very low in the fixed income market — the 30-year bond closed below 9% at the last auction and some blue-chip companies are trading at a 15% dividend yield, so people are going to rotate into equities once again,” Abimbola said by phone.
The rapid run-up in Lagos stocks has sparked at least one warning signal: the 14-day relative strength index on the benchmark equity gauge has climbed above 96, well above the level of 70 that signals to some technical analysts that the gains may be overdone and ripe for a correction. The market is looking the most overbought since August 2006.
The government last month announced the end of costly subsidies on electricity and gasoline, among the reforms needed to support the economy after the plunge in oil prices eroded the country’s biggest source of revenue. Recent gains in Brent crude have also boosted sentiment toward a stock market that’s light on foreign involvement because of restrictions on hard-currency supplies, said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer.
“The 7% bump in the oil price and the removal of the fuel subsidy without provoking industrial action are both helping Nigerian stocks,” Malik said. “But this remains a local-to-local market. Foreigners are still loath to look at cheap equity valuations as long as foreign exchange and repatriation of capital remains constrained.”