Onome Amuge
Uche Uwaleke, a professor of Capital Market at the Nasarawa State University, Keffi, has projected a golden opportunity for investors in the Nigerian stock market during the second half of 2024.
However, he has cautioned investors to be wary of the possibility of a market downturn during this period, considering the market’s recent peak in H1 2024. Despite this, Uwaleke has identified a few potential game changers, the most notable being the highly-anticipated listing of Dangote refinery, which could significantly impact the market in H2 2024 if it materialises.
These predictions were elucidated in a presentation titled “The Nigerian Economy and Capital Market Outlook for H2 2024,” delivered by the capital market expert at the ASAM Quarterly Webinar, where he illuminated the potential trajectory of the Nigerian economy and capital market in the second half of 2024.
“Overall, the investment environment in H2 2024 will most likely be VUCA-oriented. In a VUCA (Volatile, Uncertain, Complex, Ambiguous) world, an investor’s best bet is to stay with my time-honoured investing advice which entails diversification, hedging and long-term perspective- the DHL approach to investing,” he stated.
To this end, Uwaleke advised investors to adopt the DHL approach given the period’s VUCA Environment. This include:
- D- Diversify portfolios focusing on stocks with good fundamentals and track record of dividend payments.
- H- Hedge Risks by investing in fixed income, dollar-denominated assets, commodities and other asset classes (also a form of diversification). Continuously monitor and revise portfolio in line with economic conditions and develop capacity to identify early warning signals.
- L- Adopt a long-term perspective when investing in stocks in a VUCA environment.
Taking into account the projected foreign exchange scenario, Uwaleke anticipates that the naira will likely maintain its current value (below N1,500/$) during H2 2024, as external reserves are anticipated to increase owing to the foreign loans already secured by Nigeria and the planned issuance of Eurobonds prior to the end of the year. This stable exchange rate is expected to have a positive impact on both the domestic economy and the capital market.
The president of the Association of Capital Market Academics of Nigeria (ACMAN) believes that the recent foreign exchange market reforms initiated by the CBN, which includes the increase in minimum capital requirements for BDCs, will contribute to improving the discipline and efficiency of the BDC market segment, by ensuring that BDCs operate within the regulatory framework and maintain higher capital buffers to cushion against volatility in the forex market.
However, he cautions that a strong appreciation of the naira may not be possible in H2 2024, given the potential hurdles such as lower oil revenue due to the Nigerian National Petroleum Corporation (NNPC) exchanging crude oil for dollar loans, as well as speculative activities in the foreign exchange market fueled by high inflation.
Uwaleke also projected that the headline inflation rate will likely remain high (in the range of 28% to 30%) during H2 2024, owing to factors including: High energy costs, limited domestic food production, pass-through effects of naira depreciation on import costs, legacy factors namely transport challenges, insecurity, flooding and Immediate impact of upward minimum wage adjustment.
Uwaleke envisions a persistently high interest rate environment (MPR) in H2 2024, owing to a confluence of factors, namely:
- Stubborn inflation and high exchange rate challenge
- Unprecedented hikes in the MPR and increase in CRR in H1 2024 which have raised the cost of funds for businesses and reduced access to credit.
- The IMF’s recommendation to the CBN to further tighten monetary policy in its 2024 Article IV Consultation with Nigeria.
- Increase in FG borrowing to finance budget deficit and pay down CBN’s Ways and Means.
According to Uwaleke, the tax environment in Nigeria will likely continue to be hostile in the second half of 2024, though this is anticipated to be a short-term development. In his view, this persistent hostility in the tax environment will likely result in a loss of revenue for the Nigerian government, due to ongoing challenges in the tax system such as multiple taxes, inefficiencies in tax collection and administration, and the exit of companies from Nigeria.
Although Uwaleke expresses pessimism in the short term, he maintains optimism in the medium to long term. He anticipates that beyond 2024, the implementation of the recommendations of the presidential committee on tax reforms, headed by Taiwo Oyedele, will lead to a more favourable business environment, which will boost production and government revenue. He noted that as per the committee chairman’s statement, the primary objective of the committee is to broaden the tax base without introducing new taxes or raising tax rates.
In terms of the financial markets, Uwaleke predicts that investor sentiment towards banking stocks will likely remain weak in H2 2024, due to factors such as macroeconomic uncertainty and the high-interest-rate environment. Concurrently, increased federal government borrowing from the domestic capital market at high-interest rates will continue to make government bonds more appealing to investors compared to equities, as they offer a relatively lower level of risk and provide a steady stream of income.
On the money market front, Uwaleke envisions that the persistently high-interest rates will make money market instruments, such as Treasury Bills (TBs) and Commercial Papers, more appealing to investors in H2 2024, due to their relatively stable returns and short-term nature.
Uwaleke further forecasts that the financial markets will be characterized by a high degree of uncertainty in H2 2024, primarily due to potential unexpected changes in fiscal policy that may have a significant impact on the markets.
Pertaining to key drivers of capital market outlook in H2 2024, he stated: “Gazing through my crystal ball, I see a stock market that will likely pull back in H2 2024 having attained a peak in Q1 2024. If history is any guide, market correction will most likely occur in H2 2024.
“The positive impact of the works of the Presidential Committee on Fiscal Policy and tax reforms and the Presidential Economic Coordination Council are expected to manifest in 2025.”
The former commissioner of finance, Imo State, identified major factors that will shape the performance of the Nigerian capital market in H2 2024 including:
The Monetary policy tightening stance: Uwaleke believes the MPC is likely to pause rate hike in H2 2024 following the inauguration of PECC. But the impact will be felt in 2025.
Elevated inflation: Uwaleke projected that inflation will likely remain elevated in H2 2024 chiefly from the impact of fuel subsidy removal and naira devaluation.He noted that though Inflation is forecast by the NBS to moderate to below 30 percent in 2024, this is still a far cry from the CBN’s target band of 21.4 percent in 2024.
Based on this, Uwaleke pointed out that elevated inflationary pressures contribute to rising costs of production, erode profitability and shareholders’ value as well as dampen investors’ confidence.
–Weak GDP growth: Uwaleke projected that the domestic business environment, characterised by high interest rates, high exchange rates, and high energy costs, will continue to impede strong GDP growth in Nigeria, with the manufacturing and agriculture sectors being the hardest hit. According to the latest GDP report released by the National Bureau of Statistics (NBS), these sectors are already experiencing a decline in growth rates, indicating the adverse impact of these challenges on economic activity. In light of this, Uwaleke predicts that companies in the agriculture, industrial, and consumer goods sectors are likely to experience a decline in their share prices during H2 2024.
–Naira depreciation: Commenting on recent reports indicating the naira’s persistent depreciation against the dollar despite the CBN’s interventions, Uwaleke explains that unless the demand side is addressed by reinstating the 43 items to the forex market, the pressure on the foreign exchange market will likely persist. As a result, companies that rely on imported raw materials will be adversely affected, potentially leading to diminished profits and dividend payouts.
Uwaleke further explains that the naira’s depreciation incentivises food smuggling out of Nigeria, which, in turn, affects domestic food prices and exacerbates inflation. He also noted that the devaluation of the naira deters the import of food items and essential inputs, leading to a reduced supply of these products and further driving up inflationary pressure.
