What’s driving NGX ?
AT the basic level, share price of a quoted company is driven by the company’s performance, demand and supply and market hearsay. These also include the company’s level of earnings base and the perceived risk and opportunities associated with the company through external factors such as a change in the government policy.
The rising profile of our premier securities market, Nigerian Exchange Limited ( NGX), as the best performing bourse in the world has defied the concept of January Effect. This is associated with market upswing at the beginning of the year, especially in January. The January Effect is ascribed to factors such as consumer sentiment, year- end bonuses, tax- loss harvesting and year- end report performances.
Against the run of headwinds that impacted the global economies last year, NGX closed with a robust return of 45.9 per cent while inflation rate was 28.7 per cent, a justification that one can deploy investment in stocks to hedge against inflation. It is exciting and historic to note that for the first time in its 62- year trading, the Exchange’s All- Share Index has crossed over 100 basis points. The financial press has been having a field day, with creative headlines on the strong market performance
The bull- dominated market, has literally brought about two divergent groups from the top market analysts. While some believe that the bulls run may become a replay of the market crash of 2007 during correction, others insist that the anticipated market correction would be normal. Those who questioned the rally explained that there was no relationship between the state of economy and the current market upswing.
Their logic is that rising inflation rate, high exchange rate, forex scarcity with attendant effect on production cost, unemployment, and shrinking purchasing power of consumers are all indices of a struggling economy. To these observers, what then is driving the market? Their concerns cannot be ignored since quoted companies operate in the economy. It is expected that whatever affects the economy may impact the operations of these companies.
To this group, speculators have taken over the market. At one point, some of the analysts urged the management of NGX to apply circuit breaker, a regulatory measure that suspends trading on an exchange for a brief period, when there is extreme volatility. By section 15.46 of the amended the Rule of NGX, if the All- Share Index moves by a value prescribed by the exchange between 10.15 am and 13.45, a 30- minute trading halt shall be applied . It was formerly five percent move in the All- Share Index. The other group strongly believes that the market is undergoing correction due to a long period of undervalue. According to these market watchers, investors are also responding positively to the ongoing efforts of the Tinubu Administration to reform the comatose economy through a series of market reforms. Their position is further strengthened as investment in stock is forward looking. A company’s current result is historica. Therefore, investors buy into the future of a company.
However, both groups agree that many stocks on NGX are grossly undervalued. This is a fact that some of us have always canvassed over the years. It is the same reason that has encouraged foreign portfolio investors to take position in our market with their hot money. However, when they spot a slight concern in the operating environment, they press their panic buttons and go. Although they are basically speculators, they contribute to market liquidity.
Issues such as forex scarcity and exchange rate risks have created a big river between them and the market. This has led to a paradigm shift in the share ownership of quoted companies on NGX. Indigenous investors are devouring stocks while corporate raiders are having a field day.
Adherence to corporate governance by the regulators and operators may have also endeared some high networth investors into the market. Indigenous investors nowadays control above 87 per cent of shares of quoted companies on NGX. By this analysts are of the opinion that market correction would not have significant impact on share values. Indigenous investors are not agents of hot money and it is not as if they love NGX so much.
But rational investment decision, backed by sound analysis of risk and return trade- off may have convinced them that during inflationary period like this, investment in stocks is a hedging strategy to generate real return. Due to low interest rate, money is moving from the banking sector into the stock market.
Last week, there were media reports of some stocks that outperformed inflation. One of the top analysts said that 2024 started with strong interest of Pension Fund Administrators ( PFAS), especially in the banks stocks and this triggers rally. The valuation of banks is believed to be sustainable. The sector is said to be undervalued. There are whispers that banks’ capital base would go up significantly and their shares would not trade below N100 per unit. By this assumption, there is possibility of sustained upswing in the sector. But an analyst was reluctant to say the same about the real sector.
Everyone seems to believe that market has to respond to the devaluation of the Naira. But the Central Bank Governor, Yemi Cardoso has raised a red flag that the Naira is undervalued. Who will blink first? Curiously, the stocks that are really moving the market are just about thirty percent of the quoted companies. An interesting thing about the bull run is that many investors are just buying because of fear of finding out ( FOFO). Herd instinct has also pushed some investors into borrowing short term money for quick return from the market. This is a clear issue of mismatch. Some investors are so naïve that they expect the market to keep rising. Such investors never knew that they are playing a mug’s game. Sophisticated investors, including stockbrokers do get their fingers burnt too through greed during bullish trading.
The market has a self- correcting mechanism and it may move against anyone that invests blindly. The high market mood is expected to start correction any moment from now as some investors will begin to realise profit. This usually leads to share glut. It brings out the true value of each quoted shares, a process called price discovery.
How many investors in Nigeria have investment objective? How many know their risk tolerance and time horizon? The market regulators cannot afford to adopt a dovish stance on the need to review the investor education model with emphasis on risk aversion measures. The Securities and Exchange Commission ( SEC) and NGX should come up with a new blueprint to enable investors appreciate that investment in the stock market is for medium and long term.
With their renewed interest in equity investment on NGX, investors should seek professional advice from stockbrokers on how to make informed decisions to enhance their life cycle cash flow.