Reuters reports that Nigerian stocks are expected to keep rising in 2018, fueled by hopes that lower interest rates and a stable currency will help corporate profits, but traders say gains might be short-lived.
The all-share index crossed 38,000 points on Friday, with stocks climbing 42 percent for 2017 – its biggest gain since 2013. Traders foresee another 10 percent rise next year, to as high as 42,000 points.
Stocks gained 0.66 percent on Friday, the second day of gains this week, as investors took positions in banking and consumer goods companies.
“Stocks could go up to 42,000 points next year. We still see interest in stocks which we think will continue into the first quarter,” a stockbroker at Chapel Hill Denham told Reuters.
But the rally will depend on the strength of 2017 earnings reported in the first quarter, the broker said. Weaker-than-expected profits might curtail the rally, and the run-up to 2019 elections may create uncertainty as well.
Foreign investors returned to Nigerian assets after the Central Bank of Nigeria (CBN) in April lifted currency controls in a bid to attract inflows and support the naira. The currency moves helped propel stocks and increased its dollar reserves.
The gains have also drawn locals back to the market as Nigeria climbed out a recession this year, helped by a rise in oil prices and production. The country’s benchmark index rallied by 43 per cent this year as the government implemented temporary tax cuts and a loan guarantee program that encouraged banks to lend to small businesses. Gross Domestic Product (GDP) growth soared, reaching 11.1 percent in the third quarter.
Meanwhile, the government has paid off 198 billion naira worth of treasury bills this month instead of rolling them over, to lower what it pays to borrow. That fuelled speculation about the outlook for official interest rates.
The CBN kept rates at 14 percent for more than a year to battle inflation and support the naira. Analysts now expect rates to fall by 100 basis points next year, which could lead locals to switch to equities from bonds.
Banking stocks have outperformed this year, rising 72 percent. Consumer goods shares rose 35 percent. Analysts expect mid-tier lenders such as Fidelity Bank, FCMB and Diamond Bank, to lead the market next year.
Pension fund manager Adeniyi Falade, who has around 200 billion naira under management, said he saw value in mid-tier lenders and plans to rotate funds out of money market to equities next year.
“We anticipate further gains for the Nigerian bourse amidst a positive outlook for FX earnings … which would buoy company earnings … as well as our expectation of lower interest rates in 2018,” analysts at Vetiva Capital said.
The hopeful scenarios follow on the hills of recent a CNN report that revealed that Nigeria’s stock market has been named to be amongst the five top performers in 2017, topping equities markets of most major European, Middle Eastern and Asian countries.
The report which examined the performances of global equities’ markets, listed the United States stock market to have average 25 per cent, Nigeria 43 per cent, Turkey 43 per cent, Argentina 73 per cent and Hong Kong 35 per cent as the major outperformers.
Analysts have said the ingenuity of the CBN in the management of the foreign exchange market helped notch Nigeria’s stock market to be amongst the five top best performing exchange for 2017.
It would be recalled that the NSE was able to achieve this after posting losses for three consecutive years, 2014 to 2016, as a result of the introduction of the Importers and Exporters’ Window (I&EW) in mid-April which helped stabilize volatility and liquidity in the forex market, pulling back foreign investors who have been waiting on the sideline.
These unorthodox approaches by the CBN–much maligned at the time–also improved macro fundamentals as Nigeria exited recession, boosted external reserves, brokered peace with militants amid oil price rally and improvement in ease of doing business and strong corporate earnings results.
Several reports agree that the Nigerian stock market has so far this year recorded a 43 per cent gain after the central bank made it easier to swap foreign currencies through the special window called the ‘Investors’ and Exporters’ FX Window’ created on April which also helped the country ease out of a short but painful recession.
Also, whereas the Nigerian All-Share index is still miles below record highs set in early 2008, a 43 per cent rally in 2017 has helped to close the gap. The index suffered mightily in 2015 and 2016 as low oil prices, militant attacks, currency troubles, elections and Ebola hit investor sentiment.
Founder and CEO of Silk Invest, Zin Bekkali explained that oil prices have moved higher, the central bank has made it easier to swap currencies and the economy has snapped out of recession, noting that “If you look at where we stand today, the [Nigerian] market is still one of the cheapest markets on the planet.”