Nigerian equities sunk into the red in February with sustained losses in four consecutive weeks eroding early gains and building up losses in most portfolios. Deputy Group Business Editor, Taofik Salako, reports on the near market-wide depreciation and apprehension over the market outlook
The bears are on the rampage. Nigerian equities closed weekend with average decline of 6.16 per cent in February 2021, equivalent to net capital depreciation of N1.36 trillion.
From large to mid to small-cap stocks, from financial services to manufacturing, agriculture and engineering, from stocks to ethical stocks, the rampaging bears left the telltales of losses.
With the exception of the oil and gas sector, all sectoral indices at the stock market closed negative, underlining the widespread price depreciation that has shaken the boisterous confidence occasioned by world-ranking returns in 2020 and January 2021.
The All Share Index (ASI)-the value-based common index that tracks all share prices at the Nigerian Stock Exchange (NSE) closed weekend at 39,799.89 points as against February’s opening index of 42,416.66 points.
The ASI-being Nigeria’s largest equities index doubles as Nigeria’s sovereign equity index and serves as a broad measure of the mood at the domestic market and its competitiveness against the global advanced and emerging markets. The decline in February pushed the two-month average year-to-date return for the Nigerian equities market to -1.17 per cent, eroding positive return of 5.32 per cent recorded in January 2021.
Aggregate market value of all quoted also dropped correspondingly from February’s opening value of N22.187 trillion to close weekend at N20.823 trillion, representing a loss of N1.36 trillion or 6.15 per cent. The concurrence between the changes in ASI and market capitalisation underscores the fact that the steep decline was almost entirely due to share price depreciation, rather than other corporate changes such as delisting, share reconstruction and merger among others. With the February decline, net capital depreciation for the two-month period stands at N234 billion on straight line deduction or N246.4 billion when adjusted fully alongside the ASI.
The ASI had opened 2021 at 40,270.72 points and rallied to 42,416.66 points in the first month. Aggregate market value of quoted equities, which opened 2021 at N21.057 trillion, had rallied to N22.187 trillion by the end of January 2021.
The decline in February was driven by widespread profit-taking transactions as investors sought to monetise capital gains or realign portfolios away from quoted equities, despite the onset of the earnings season and expectations of dividend declarations. With the exception of the oil and gas sector, which has continued to play the contrarian riding on the back of global oil recovery, all sectoral indices at the NSE closed weekend negative. Most highly capitalised stocks suffered above-average decline during the period, with losses in the influential banking and industrial goods sectors more than three percentage points above the benchmark. The industrial goods sector is the most capitalised sector while banks are the most active and liquid stocks at the Exchange. The NSE Oil and Gas Index posted a positive return of 4.36 per cent in February, extending the sector’s unbeaten run to a two-month average return of 17.33 per cent.
The NSE Industrial Goods Index showed negative average return of -8.80 per cent for February 2021. The NSE Banking Index posted a negative return of -9.73 per cent. The NSE 30 Index-which tracks the 30 largest stocks at the NSE, closed weekend with average return of -7.41 per cent for the month. The NSE Insurance Index recorded the highest decline of 17.82 per cent for the month. The NSE Consumer Goods Index closed weekend with a negative average return of -8.12 per cent for the month. The NSE Pension Index, which tracks stocks specially screened in line with pension funds investment guidelines, closed February with a negative return of -7.68 per cent. The NSE Lotus Islamic Index, which tracks ethical stocks in compliance with Islamic Shari’ah, declined by 6.12 per cent during the month.
Also, the NSE Main Board Index- which tracks stocks on the main, oldest and largest board at the Exchange, declined by 6.14 per cent. The NSE Premium Index-which tracks some large-cap stocks with high liquidity and capitalisation, including Dangote Cement, the largest stock at the market, declined by 6.20 per cent in February 2021. The NSE Corporate Governance Index- which mirrors stocks with high corporate governance standards, posted negative return of -7.65 per cent while the NSE Sovereign Bond Index-which tracks national debt issues by the Federal Government of Nigeria, showed a decline of 0.94 per cent within the month.
Further analysis showed that the February slump has also eroded previous gains by most investors, deepening the sense of loss. The NSE Industrial Goods Index now carries a negative two-month average year-to-date return of -7.51 per cent. The NSE Banking Index has so far this year declined by 2.61 per cent. The NSE 30 Index closed weekend with average year-to-date return of -2.84 per cent. The NSE Lotus Islamic Index has declined by 2.79 per cent so far this year. The NSE Consumer Goods Index closed weekend with average year-to-date return of -1.66 per cent. The NSE Pension Index closed with a two-month negative return of -0.77 per cent. The NSE Corporate Governance Index dropped by 1.29 per cent within the two-month period. The NSE Main Board Index carries a marginal negative return of -0.15 per cent. The NSE Premium Index posted a negative two-month return of -2.33 per cent while the NSE Sovereign Bond Index remained with -0.94 per cent. However, the NSE Insurance Index drew on its substantial gain in January to retain a positive two-month return of 6.64 per cent while the NSE Oil and Gas Index sustained the highest year-to-date return of 17.33 per cent.
Market analysts said the downtrend at the equities market might not be unconnected with the increasing yields in the fixed-income market. At the last auction for Nigerian Treasury Bills (NTB), stop rates rose by an average of 254 basis points to 3.67 per cent as against 2.33 per cent at the previous auction.
Most analysts are increasingly becoming cautious, balancing expectations of positive sentiment from corporate earnings and dividend recommendations with the possible flight to safety in rising low-risk fixed-income returns.
Analysts at Cowry Asset Management Limited said equities may further trade southwards as investors trade cautiously amid rising fixed income yields. They however expected investors to position in companies which are expected to announce good dividend payments.
Analysts at Cordros Securities said they expected increased flow of corporate earnings in the days ahead as more companies publish their audited full-year results for 2020. Companies quoted on the NSE are expected to submit their audited result not later than 90 days after the end of the relevant business year. Most companies, including all banks and major corporates, use the 12-month Gregorian calendar as their business year. Thus, most companies are expected to submit their audited results, usually accompanied with dividend recommendations, not later than March 31, 2021.
“We believe this (earnings and dividends) should provide respite for market performance. However, we expect intermittent profit-taking activities to continue due to lingering concerns about yield elevation in the fixed-income market. As a result, we think the local bourse will likely exhibit a zig-zag pattern. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings,” Cordros Securities stated.
Afrinvest Securities said it expected “trading sessions to be a mix of bargain hunting and sustained sell-offs”.
According to analysts at Afrinvest, the direction of yields in the fixed income market would also influence trades especially given the sustained increase in marginal rates at the Open Market Operation (OMO) auction.
The portfolio shift due to rising fixed-income yield is not limited to the Nigerian or emerging markets alone, investors across the world are showing risk aversion, conscious of the improving yields at the fixed-income market.
Market Analyst, FXTM, Han Tan noted that the massive ascent in yields is prompting investors to cast serious doubt over their exposure to equities, especially for global tech stocks. While global equities indices are declining, Tan pointed out that the rising yields gave reason for the dollar index to keep its head above the 90 psychological level for the time being.
According to Tan, investors were inclined to think of long-running increase in yields and were concerned by about possible tapering by the US Fed. Fed funds futures are already pointing to an interest rate hike that has brought forward to the end of 2022, from 2024.
“With such a debate raging, we can expect to see more volatile days ahead until markets can reach a greater consensus and a firmer understanding over the Fed’s next policy steps, which should in turn offer a new equilibrium for treasury yields,” Tan said.
The calls have mostly been for fixed-income securities. Spot gold was on course to register its sixth monthly loss from the past seven, with rising treasury yields dealing a blow to the non-yielding precious metal. Bullion’s year-to-date losses stand at 7.12 per cent at the time of writing.
“Despite the threat of rising inflation, investors are clearly willing to ditch gold in favour of other assets that can better ride on the economic recovery’s coattails, as well as the subsequent overshoot in prices. Gold ETFs have shed their holdings by more than 2.0 million ounces so far this year,” Tan noted.
Cycle of gains and losses
Amid the COVID-19 pandemic and economic recession, Nigerian equities had played the full contrarian to close 2020 with net capital gain of N6.48 trillion. Benchmark indices at the NSE showed average full-year return of 50.03 per cent for the 2020 business year. It was ranked highest in the world. This implied net capital gain of N6.483 trillion. The recent highest return was 42.3 per cent recorded in 2017. The ASI closed 2020 at 40,270.72 points, 50.03 per cent above 26,842.07 points recorded as opening index for the year.
Aggregate market value of all quoted equities at the NSE rose to N21.057 trillion by the end of 2020 as against N12.958 trillion recorded as opening value for the year, an increase of N8.1 trillion. The additional increase in value of market capitalisation, above the ASI percentage change, was due to additional or supplementary listing of shares during the year.
While a steep decline of 18.75 per cent in March 2020 had driven the first quarter to a negative return of -20.7 per cent or net loss of N2.68 trillion, the market recovered in the second quarter with positive average return of 14.12 per cent or net capital gains of N1.656 trillion. It continued its rally with average return of 9.61 per cent or net capital gains of N1.23 trillion in third quarter 2020.
The recovery since 2020 is particularly spectacular when viewed against the background of negative performance in recent years. After posting a world-ranking return of 42.3 per cent in 2017, the market had reversed to negative in 2018 with average full-year return of -17.81 per cent.
In 2019, investors suffered net loss of about N1.71 trillion with negative average return of -14.60 per cent. Prior to 2017, the stock market had been on a losing streak since 2014. Investors lost N1.75 trillion in 2014 and followed this with another loss of N1.63 trillion in 2015. Against the general expectation that political transition and new government will quicken a rebound, equities closed 2016 with a net capital loss of N604 billion.
Will earnings and dividend recommendations enliven the market in March? A cocktail of fixed-income yields, dividend yields, earnings performance and global crude oil performance will moderate equities’ return in the weeks ahead. But it appears too early to call the market for the bear.
– The Nation