What are the drivers of price movement on NGX?

SOLA ONI 

Sola Oni, an integrated communications strategist, Chartered Stockbroker and Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications. You can reach him at onisola2000@yahoo.com

The rising profile of our premier securities market, Nigerian Exchange Limited (NGX), as the best performing bourse in the world has defied the concept of ‘January Effect’. This is associated with market upswing at the beginning of the year, especially in January. The ‘January Effect’ is ascribed to factors such as  consumer sentiment, year-end bonuses, tax-loss harvesting and year-end report performances.  

Against the run of headwinds that impacted global economies last year, NGX closed with a robust return of 45.9 percent while inflation rate was 28.7 percent, a justification that one can deploy investment in stocks to hedge against inflation.  It is exciting and historic to note that for the first time in its 62-year trading, the Exchange’s All-Share Index has crossed over 100 basis points. The financial press has been having a field day, with creative headlines on the strong market performance.

The bull-dominated market, has literally brought about two divergent groups from the top market analysts. While some believe that the bullish run may become a reminiscent of the market crash of 2007 during correction, others insist that the anticipated market correction would be normal. Those who questioned the rally explained that there was no relationship between the state of the economy and the current market upswing. Their logic is that  rising inflation rate, high exchange rate, forex scarcity with attendant effect on production cost, unemployment, shrinking purchasing power of consumers are all  indices of a struggling economy. To these market watchers, the question to ask is: What is driving the market? Their concerns  cannot be ignored since  quoted companies operate in the economy. It is  expected that whatever affects the economy may impact the operations of the quoted companies. To this group, speculators have taken over the market. At one point,  they urged the management of NGX to apply circuit breaker, a regulatory measure that suspends trading on an exchange for a brief period when there is extreme volatility. By section 15.46 of the amended Rule of NGX, if the All-Share Index moves by a value prescribed by the exchange between 10.15 am and 13.45, a  30-minute trading halt  shall be applied to curtail the volatility. It was formerly a five percent move in the  All-Share Index.

An interesting thing about the market is that there is an answer to every question. The other group strongly believes that the market is undergoing correction due to a long period of undervalue. To this group, investors are also  responding positively to the ongoing efforts of the Tinubu administration to rebuild the economy through reforms at different levels. Investment in stock is forward looking. A company’s current result is historical. Investors buy into the future of a company.  This also strengthens the position of this group.

However, both groups agree that many stocks on NGX are grossly undervalued. This is a fact that some of us have been canvassing over the years. It is the same reason that has encouraged foreign portfolio investors  to take positions in our market with their hot money. At every little change in the operating environment, foreign portfolio investors press their panic buttons and go. Although they are basically speculators, they contribute to market liquidity. It is obvious that forex scarcity and exchange rate risks among others have created  a big river between them and the market. This has led to a paradigm shift in the share ownership in our market. 

Nowadays, indigenous investors are devouring stocks. They currently control above 87 percent of shares of quoted companies on NGX.  They are not agents of hot money and it is not as if they love NGX so much. But rational  investment decision, backed by sound analysis of risk and return trade-off may have convinced them that during inflationary period like this, investment in stocks is a hedging strategy to generate real return. So much money is moving from the banks to the market due to the low interest rate. 

Last week, there were media reports of some stocks that outperformed inflation. One of the top analysts said that 2024 started with strong interest of Pension Fund Administrators (PFAs), especially banking stocks, and that this triggers rally. According to him, the valuations of banks are sustainable but he was reluctant to  say the same about the real sector. Another analyst argued that market correction would not depress the market significantly because banks’ capital base would go up significantly and their shares would not trade below N100 per unit. By this assumption, there is a possibility of sustained upswing in the sector. Everyone seems to believe that the market has to respond to the devaluation of the Naira. But the Central Bank governor, Yemi Cardoso has raised a red flag that the Naira is undervalued. Who will blink first? 

The stocks that are really moving the market are just about thirty percent of the quoted companies. An interesting  thing about the bull run  is that many investors are just buying because of fear of finding out (FOFO). Herd instinct has also pushed some investors into borrowing short term money for quick return from the market. This is a clear issue of mismatch. Some are so naïve that they expect the market to keep on rising. Such investors don’t ever know that they are playing a mug’s game. But by greed, sophisticated investors, including  stockbrokers do get their fingers burnt too. 

The market has a self-correcting mechanism and it may move against anyone that invests blindly. The high market mood is expected to start correction any moment from now as some investors will begin to realize profit. 

How many investors in Nigeria  have investment objective? How many know their risk tolerance and time horizon?

The market regulators cannot afford to adopt a dovish stance on the need to review the investor education model with emphasis on risk aversion measures.  The Securities and Exchange Commission (SEC) and NGX should come up with a new blueprint to enable investors appreciate that investment in the  stock market is for medium and long term. The market operators, especially Association of Securities Dealing Houses of Nigeria (ASHON) and Chartered Institute of Stockbrokers (CIS) should also engage investors on the risks and opportunities in the stock market.

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