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It’s been a bull run for the ages in Nigerian stocks since President Bola Tinubu was sworn-in on May 29, but foreign investors are not buying the Tinubu stock rally, literally.
Nigerian stocks have gained N6.94 trillion in market capitalization in the 3-months period since Tinubu’s ascension to the presidency, largely led by domestic institutional and retail buying.
In that time period, foreign investors sold N21.94 billion worth of Nigerian stocks on a net basis, according to data from the NGX.
On a year to date basis (Jan – July) foreign participation in the Nigerian stock market is down to 8.62%, from 15.49% a year ago in 2022.
“The cost of capital is high in global markets now and many funds are facing serious redemption, so general funds availability for Global EM is low,” Abiola Rasaq, economist and former Head Investor Relations for United Bank for Africa (UBA), told MoneyCentral.
“More so, investors want to see the end of the election cases and also want to be sure of follow-on reforms, to avoid the Buhari trap. Incidentally, Nigerian investors have taken so much position ahead m, thus even making valuation less attractive now.”
The value of domestic transactions on the bourse has surged by 32% year-on-year to N1.968 trillion, equivalent to 91.38% of all trades so far in 2023, the data showed.
The Tinubu stock rally has pushed Nigeria’s NGX All-Share Index up 32.96% year to date, hitting a multi-year high of 68,143.34 points and market capitalisation of N37.29 trillion.
President Bola Tinubu, who is embarking on the country’s biggest reforms in decades to tackle issues including a high debt burden, scrapped the popular but expensive fuel subsidy when he took office in May.
The Central Bank of Nigeria (CBN) has let the country’s currency the naira trade more freely versus the dollar, following Tinubu’s criticism of a currency regime that had hampered Africa’s biggest economy for years.
World Bank lead economist for Nigeria, Alex Sienaert, said recently that Nigeria could save up to N3.9 trillion ($5.10 billion) in 2023 after reforms to its foreign exchange market and removal of fuel subsidy.
Nigeria’s 36 sub nationals or States also have more reason to smile in the coming months as the devaluation of the Naira and fuel subsidy removal should lead to an increase in FAAC revenue allocation from the Federation account.
Challenges however remain for firms and consumers as Nigeria’s inflation rate increased to 24.08 per cent in July 2023, from 22.79 percent in June, according data from the National Bureau of Statistics (NBS).
Nigerian manufacturers from Dangote Cement to BUA foods are feeling the pains of rising raw material costs brought on by geopolitical tensions, foreign exchange illiquidity and currency devaluations that are squeezing profit margins.
The most liquid and capitalised manufacturers, collectively incurred N2.85 trillion, as input costs in December 2022, which is 36.36 percent higher than 2021’s N2.09 trillion, according to data gathered by MoneyCentral.
“Supply chains continue to be challenged by volatile price of commodities, FX sourcing, and logistics bottleneck. Players have been hit by high agricultural commodity prices and difficulty in sourcing FX to ensure efficient supply of raw materials,” said analysts at Afrinvest Securities Limited.
For the second half (H2) of 2023, Meristem Securities analysts are bullish on Information and Communication (ICT), Mining and Quarrying, and the Financial and Insurance sectors.
Nigerian stocks are relatively cheap despite the run up, and are currently trading at a price to earnings (P/E) ratio of 12.31, according to Bloomberg data.
Rasaq the economist however expects the Tinubu stock rally to fade in 2024, which could present an entry point for foreign portfolio investors (FPIs).
“I expect negative return for the market next year and afterwards FPIs would come to pick up the stocks, especially as interest rate should begin to ease in many developed markets from next year,” Rasaq said.