The Nigeria Stock Exchange (NGX) in Nigeria is currently experiencing a strong momentum in the stock market. In the previous year, it ranked as one of the top performers globally with a 45.9% increase, but this year is showing even more promising results. In just a little over two months into the new year, it has already surged by over 30%, surpassing any other African stock market. As at the end of February, the NGX’s All-Share Index had risen by 33.71% since the beginning of the year. Despite the positive expectations, Nigeria’s economy and productivity are not thriving as one would anticipate. The stock market continues to defy macroeconomic factors that should normally cause it to decline.
Last year, the naira experienced its most challenging period since the return of democracy. Record lows of ₦1534/$ and ₦1910/$ were reached in official and parallel markets, respectively. Countless businesses have been devastated by this economic turmoil. The Manufacturers Association of Nigeria reported that 767 manufacturing companies closed down in 2023, with another 335 facing financial difficulties. In 2023, there were reports of companies holding unsold goods amounting to ₦350 billion, with a decrease in capacity utilization to 56%.
Economic instability pushes multinational companies out.
Multinational companies in Nigeria have been rapidly leaving the country in what many experts consider to be the fastest exodus in recent memory. The reasons behind this mass departure include expensive production costs, a shortage of foreign exchange, and a lack of consumer demand. Representative Patrick Umoh of the House of Representatives attributes these exits to economic instability, difficult business conditions, limited access to electricity, ongoing depreciation of the national currency, excessive taxation, security concerns, inadequate infrastructure, congested ports, and strict government regulations.
This problem is not affecting only manufacturers as MTN Nigeria, the biggest telecommunications company in the country, recently disclosed its first post-tax loss (₦137 billion) since becoming listed on the Nigerian stock exchange. The CEO of MTN Nigeria, Karl Toriola, mentioned that due to the sharp devaluation of the naira, there was a substantial increase in net forex loss amounting to ₦740.4 billion in 2023 (advised as ₦81.8 billion in 2022). This was reflected in the net finance costs, ultimately leading to a reported loss after tax of ₦137.0 billion as opposed to a PAT of ₦348.7 billion in 2022.
Investors are banking on potential beneficial policy shifts.
In terms of foreign capital inflow to the country, Nigeria saw a significant decrease with foreign investment dropping by 26.7% to $3.9 billion in 2023 from $5.3 billion in 2022. The banking industry was hit even harder, with inflows decreasing by 60% to $832.64m. Despite this bleak outlook, the stock market in Nigeria remains optimistic. One reason for this could be that Nigeria’s stock market is relatively undersized compared to its economic scale. At the moment, its value is only a fraction (15%) of Nigeria’s GDP, signalling a significant undervaluation.
Meanwhile, the majority of the value, approximately 70%, is attributed to a small group of major companies. This suggests to investors that there is still significant room for growth. Investors are also banking on potential policy shifts that could boost the profitability of large corporations. One notable example is the surge in energy stocks following reports that NNPC would no longer have a monopoly on fuel imports. The value of bank stocks experienced a significant increase as investors took note of the positive impact naira devaluation would have on assets denominated in dollars.
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BN Holdings, UBA, GTCO, Access Holdings, and Zenith) collectively made ₦2.3 trillion from gains in forex translations. UBA raked in about a third of this amount. The surge in profits can also be attributed to the movement of pension funds and institutional investors from fixed-income assets to stocks. With inflation rising faster than bond yields, fund managers turned to the stock market in order to improve their performance. According to data from the National Pension Commission, pension funds significantly increased their investment in the stock market by 53%, totalling ₦1.4 trillion as of the third quarter of 2023.
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