Some market operators have said that as long as economic factors such as inflation and high exchange rates remain elevated, share prices are likely to continue their upward trajectory.
The operators in an exclusive interview with Nairametrics noted that the stock market acts as a primary barometer of economic health, both domestically and globally, and emphasized the interconnectedness of the stock market with broader economic indicators such as inflation and exchange rates.
They added that the current share prices mirror the state of the economy, rising in tandem with high inflation and currency devaluation. Top of Form
Market performance
Available statistics to the Nairametrics showed that the All-Share Index, which is the broad index that measures the performance of Nigerian stocks, opened the trading month at 74,773.77 index points at the beginning of trading on January 2, 2024, and closed at 102,108.05 points at the end of trading on February 6th (Tuesday), gaining 27,334.28 basis points or 36.56% year to date.
This exceptional performance stands as a milestone in NGX’s history, defying prevailing economic challenges such as elevated inflation, a depreciating exchange rate, and persistent security concerns.
Inflation rate
Nigeria’s inflation rate for December rose to 28.92% from 28.20% recorded in the previous month according to the latest National Bureau of Statistics (NBS) inflation report.
The increase marks the eleventh consecutive increase in the inflation rate from February 2023.
The headline inflation rate for December 2023 experienced a rise of 0.72% points in comparison to the November 2023 headline inflation rate.
When compared to December 2022, which had a headline inflation rate of 21.34%, the year-on-year basis for December 2023 saw a substantial increase of 7.58% points, indicating a rise in the headline inflation rate during the same month of the previous year.
Additionally, on the month-on-month comparison, the headline inflation rate for December 2023 reached 2.29%, surpassing November 2023’s rate of 2.09% by 0.20%.
This signifies that the average price level increased at a higher rate in December 2023 compared to the preceding month, November 2023.
Recent Performance of Naira
Naira on Tuesday recorded a low of N1,433.89 per dollar following strong demand on the official market, also known as the NAFEM market despite various efforts of the CBN.
This represents 0.98% or N14.03 weaker than N1419.86 recorded at the close of trading on Monday.
The intraday high recorded was N1519.78/$1, while the intraday low was N894.99/$1, representing a wide spread of N624.79/$1.
On the black market, the exchange rate remained weak, with quotes as low as N1,450/$1 from unofficial dealers and N1,487.50/$1 from peer-to-peer traders. This is making it more expensive for Nigerian companies to repay their foreign loans.
The current depreciation of the naira is a result of several factors, including the rising demand for dollars from importers and the ongoing decline in Nigeria’s foreign exchange reserves.
The Central Bank of Nigeria has intervened in the foreign exchange market in an attempt to stabilize the naira, but these interventions have had limited or no success.
The depreciation of the naira is hurting Nigerian businesses and consumers. Businesses face higher costs for importing raw materials and equipment, while consumers pay more for imported goods and services.
What market experts are saying:
The Managing Director of Crane Securities Limited, Mr. Mike Eze in an exclusive interview with Nairametrics emphasized the interconnectedness of the stock market with broader economic indicators such as inflation and exchange rates.
Eze noted that as these factors rise, so do share prices, reflecting the market’s role as a barometer of economic performance.
He stated that with the investors increasingly drawn to the stock market due to its perceived profitability compared to fixed-income options like bonds and deposits, demand for equities is robust, aligning with the fundamental economic principle of supply and demand.
- “Investors are gravitating towards that market presently because it is lucrative. The income markets like bonds, fixed deposits, and commercial papers, among others are no longer lucrative, investors are closing their books in those areas and moving the funds to the equities market.
- The rally will continue because there is so much demand pressure on equities and so the economic axion of demand and supply comes into play,” he said.
Eze noted that amidst the current economic landscape, investors are consolidating their portfolios to capitalize on the opportunities presented by the equity market.
This trend according to him underscores the pivotal role of the market as a gauge of economic health, particularly in the face of inflationary pressures and currency devaluation.
He noted that the prevailing share prices mirror the broader economic dynamics, with high inflation and devalued currency translating into elevated prices of goods and services, including shares.
Eze stated that this self-adjusting mechanism underscores the market’s responsiveness to prevailing economic conditions, indicating that as long as these factors remain elevated, share prices are likely to continue their upward trajectory.
The Managing Director of APT Securities and Funds Limited, Mallam Kasim Garba Kurfi highlighted the enduring role of stocks as a hedge against inflation amidst ongoing devaluation of the naira.
Emphasizing the importance of fundamental strength, he underscored that stocks backed by robust fundamentals are poised to withstand inflationary pressures effectively.
However, Kurfi cautioned against relying solely on speculative price movements.
- “While certain stocks may experience upward momentum driven by speculation in the short term, sustainable growth may not necessarily follow suit.
- Hence, prudent investment decisions should prioritize stocks with solid fundamentals to mitigate risks associated with speculative market movements,” he said.
An independent shareholder, Mr. Joeseph Bamidele said that the prevailing environment marked by inflation soaring to 28% and significant devaluation of the naira presents unmistakable economic distortions demanding attention.
- “Amidst this backdrop, investors are increasingly turning to the stock market as a hedge against inflationary pressures.
- Consequently, this surge in investor interest has led to a notable uptick in market prices. The correlation is evident: as prices rise, more participants are drawn to capitalize on the momentum, amplifying market activity, he said.
Bamidele noted, however, that the inherent risk lies in the market’s tendency to correct itself, often catching latecomers off guard.
He stated that such corrections are intrinsic to market dynamics and can result in substantial losses for those who enter the market late in the cycle.
In addition to inflationary pressures, according to him, the recent devaluation of the naira has further influenced market dynamics.
He added that with the naira depreciating nearly 50% against the dollar, equity prices must adjust accordingly to maintain parity.
- “Devaluation inherently diminishes the value of all assets, prompting a ripple effect across various sectors.
- The stock market, as a barometer of asset valuation, swiftly reflects these adjustments, with equity prices aligning to the true worth of underlying assets held by listed companies,” he said.
Also, in an interview with Nairametrics, Executive Vice Chairman of Hicap Securities Limited, Mr. David Adonri, emphasized the potential of the Equities Market to serve as a hedge against inflation, provided that listed companies can effectively enhance their earnings yield in response to inflationary pressures.
However, Adonri, cautioned that if the increase in income fails to adequately counterbalance rising costs, there may be a disconnect between corporate valuation and price appreciation.
According to him, the current announcement of full-year results will shed light on whether corporate earnings yield justifies the current upward trajectory of prices.
He urged investors, particularly those newly entering the Equities Market, to recognize the inherent risks associated with equity exposure.
However, he underscored the non-linear relationship between Capital Market prices and fluctuations in foreign exchange rates, emphasizing that market movements are driven by aggregate economic fundamentals and sentiment.
He expressed skepticism regarding the sustainability of the current trend, noting that continuous equity price appreciation amid currency depreciation is anomalous and may not be sustainable in the long term.
What you should know
The interplay between inflation and currency devaluation underscores the intricate dynamics shaping Nigeria’s stock market.
While investors seek refuge from inflationary pressures, they must also navigate the volatility induced by currency fluctuations, understanding that market corrections are an inherent aspect of the investment landscape.
Investors seeking exposure to this potentially lucrative sector should carefully assess individual companies and risks before making investment decisions.
However, cautious optimism and effective management of potential challenges will be key to unlocking the full potential of this current exciting stock market.
