Can the Nigerian stock market sustain the recent rally?
In this report analysts at the investment banking group, United Capital Plc review the surge in the nation’s equity market in recent time, examining the variables responsible for the growth and concluded that despite concerns around the macro-economic outcome in Nigeria, “we estimate that robust system liquidity will most probably sustain demand for stocks for the rest of the year.”
Last Thursday, the Nigerian Stock Exchange (NSE) circuit breaker was triggered amid a market-wide rally, an historic event which pushed the All Share index up +13 percent week-on-week to 35,037.46 points.
Expectedly, profit taking has dominated trades so far in the week providing the market with the much needed breather to regain momentum.
While it can be argued that this rally is not entirely framed on a broad improvement in the macroeconomic fundamentals or improved corporate earnings given the rising inflation rate, concerns in the currency market and tepid GDP growth outlook, a number of factors actually drove the rally.
For context, the low to near-zero yield environment in the fixed income market coupled with the heterodox but largely expansionary monetary policy stance which continues to signal even lower yields is pushing asset managers towards riskier asset classes.
Money markets will remain awash with liquidity, c. N2 trillion worth of treasury bills and OMO markets maturities is expected to hit the system before the end of the year, with only a handful anticipated to be mopped-up. Again, with the announcement of a vaccine for Covid-19, oil prices are likely to further strengthen.
With the sharp uptick in the share prices, we are of the view that there is still a headroom for further expansion. From a technical standpoint, we observe that despite the recent upsurge, all share index is yet to touch the 45,000 psychological level attained in 2018, following changes in the policy framework at the time.
Accordingly, despite concerns around the macro-economic outcome in Nigeria, we estimate that robust system liquidity will most probably sustain demand for stocks for the rest of the year amid near-zero yield on Treasury bills.