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By Chinwendu Obienyi
Despite the frequent Monetary Policy Rate (MPR) hikes, high inflationary pressure, foreign exchange (FX) scarcity and higthenend political activities among others, financial industry analysts are convinced that the Nigerian capital market made a successful outing in 2022.
The Nigeria Exchange Limited (NGX), had opened the year at 42,716.14 points but closed it at 51,251.06 points, representing a 19.98 percent increase as against 6.07 per cent recorded in 2021.
This was as its market capitalisation- (total value of all listed equities on the NGX) grew by N5.619 trillion from N22.296 trillion to N27.915 trillion, representing a gain of N5.619 trillion whereas Year to date, the performance of all sector indices closed largely positive.
The positive performance of the market in 2022 was due to a combination of positive 2021 full year corporate earnings and dividend declarations. In addition, the accommodative interest rate environment provided room for buying interest amid low yields on fixed-income instruments.
Also noticeable was the fact that domestic investors remained dominant players in the market as total domestic transactions on the floor of the NGX rose by 1.820 trillion in eleven months of 2022 as against N364.02 billion recorded by foreign investors.
Although the domestic equities market kicked off the first trading day of the year positively, pressure from profit-taking activities in Airtel Africa, BUA Cement dragged the ASI lower. However, market analysts who spoke to Daily Sun, said it is too early to posit that the market would be bearish.
They noted that they expect investors positioning for 2022 full year results ahead of upbeat corporate earnings and reinvestment of dividends to drive bullish sentiments in the first quarter (Q1) of 2023.
According to them, market sentiments will be shaped by a combination of the outcome of the 2023 elections, market-friendly policy or reforms, the direction of monetary policy, and impact on fixed income yields, sector-specific events and the weak macroeconomic environment.
2023 elections
Investors’ perception of the nation’s general political cum economic outlook is a significant factor to consider, given the forthcoming general elections.
This is because sentiments tend to turn bullish when investors have a positive outlook on the economy while assessing the monetary and fiscal plans and policies set out by a candidate with a likelihood of emerging triumphant at the polls. However, a negative perception of the economic outlook will likely drive portfolio rebalancing to safe-haven assets. Cordros Securities in a market review and outlook report titled; Nigeria in 2023- Charting Through a Pervasive Slowdown, said the weak macroeconomic environment is expected to exert pressure on corporate profit expansion and, by extension, valuations and market performance in 2023.
“Notwithstanding, we expect a muted impact from any tensions arising from the electioneering process, given that foreign investors’ participation in the market is limited relative to previous election years. However, we note that the economic and political stability after the general elections could attract more capital inflows into the equities market. In other words, only non-violent or peaceful polls could restore investors’ confidence in the equities market, spur a bullish outcome and bolster the expected recovery post-election.
Elsewhere foreign investors will likely remain on the sidelines as the FX liquidity challenge is expected to persist (due to weak crude oil output and limited access to international debt markets)”, the report said.
Market reforms
It is very easy to state that the lack of robust and market-friendly policy reforms, such as trade restrictions, lack of flexible FX framework and insincere monetary policy actions and renewed global policies, continued to keep foreign investors on the sidelines and this is expected to happen in 2023. The Managing Director, APT Securities, Kurfi Garba, said that over the short-to-medium term, the current liquidity conditions are not expected to retrace towards pre-pandemic levels due to still weak inflows from foreign investors.
Daily Sun had reported that foreign transactions decreased by 49.46 per cent from N28.55 billion (about $64.45 million) to N14.43 billion (about $32.47 million) between October 2022 and November 2022. Also, foreign transactions have decreased by 29.38 per cent from N616 billion to N435 billion over a 15-year period.
Hence, foreign investors will need more convincing actions from the Central Bank of Nigeria (CBN) regarding flexibility and clarity in the foreign exchange framework before a resurgence of interest in the market, as witnessed in 2017 when the Investors and Exporters Window (IEW) was established.
Fixed income market yields
The Cordros report revealed that while it acknowledges that yields will remain slightly elevated in 2023 given the combination of weak market participation, monetary policy stance globally and domestically, widening fiscal deficit, and a weak macroeconomic environment; they do not expect a significant expansion in yields in 2023 considering the unwillingness on the part of Debt Management Office (DMO) to allow yields to trend significantly upwards due to rising debt
sustainability concerns.
Market return scenarios
The report said, “We postulate three scenarios for market performance next year, with the base case scenario assuming a combination of positive corporate earnings, a muted uptick in fixed-income yields, and investors’ positive reactions to the election’s outcome. In the bear case scenario, we assume a blend of significantly weaker corporate earnings and dividend pay-outs, a higher-than- anticipated uptick in fixed income yields, and a sudden violent turn in 2023 election activities to drive apathy for stocks. The final scenario expects the global economy to rebound within the year, and capital inflows strengthen as investors hunt for alpha”.
