What’s driving NGX ? By Sola Oni

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What’s driving NGX ? By Sola Oni

The Traditional Market Drivers

At the basic level, share price of a quoted company is driven by the company’s performance , demand and supply and market hearsay. These also include  the company’s level of earnings base and the perceived risk and opportunities associated with the company through external factors such as a change in the  government policy.

A Peep into the January Effect

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 the global economies last year, NGX closed with a robust return of 45.9 % while inflation rate was 28.7 %, 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

Analysts’ Debate 

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 replay 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  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 observers,  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 a quoted companies.  To this group, speculators have taken over the market. At one point, some of these analysts   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 the 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 .  It was formerly five percent move in the  All-Share Index.

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 reform the comatose economy through market reforms.  An 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.

The Synthesis

However, both groups agree that many stocks on NGX are grossly undervalued . This is a fact that some of us have always canvassed over the years. It is the same reason that has encouraged foreign portfolio investors  to take position in our market with their hot money. However, when they spot a slight concern  in the operating environment, they  press their panic buttons and go. Although they are basically speculators,  they contribute to market liquidity. Issues such as  forex scarcity and exchange rate risks  have created  a big river between them and the market.  This has led to a paradigm shift in the share ownership structure of quoted companies on NGX .  Indigenous investors  are devouring stocks while corporate raiders are having a field day.Adherence to corporate governance by the regulators and operators may have also endeared some high networth investors into the market .

The Rise of Indigenous Investors

Indigenous investors nowadays control above 87 % 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. Due to low interest rate, money is moving from the banking sector into the stock market.

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 in the banks stocks and this triggers rally. The  valuation of banks is believed to be sustainable But the analyst 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 possibility of sustained upswing in the sector. Everyone seems to believe that  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.

 Scale of Balance

Apparently, NGX has within December last year and the present produced two categories of millionaires; those who have realized their huge profit by cash and those by the current value of their holding. The latter may need tutorial on market psychology.  Stock market has a self-correcting mechanism. This is a point where a share price reflects its actual value, called price discovery.  Market correction may  move against anyone that invests blindly. NGX is expected to start correction any moment from now as some investors will begin to realize their profits. This usually leads to share glut and reduction of share price. Some are so naïve that they expect the market to keep on rising. Such investors never knew that they are playing a mug’s game. Sophisticated investors, including  stockbrokers do get their fingers burnt too through greed during bullish trading. 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. Investors should seek professional advice from stockbrokers on how to make informed decisions to enhance their life cycle cash flow.

 Oni, an Integrated Communications Strategist, Chartered Stockbroker and  Commodities Broker, is the Chief Executive Officer, Sofunix Investment and Communications

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