Despite macroeconomic headwinds occasioned by fuel subsidy removal and exchange rates unification in 2023, investors in the Nigerian stock market had reason to smile. The Nigerian Exchange All Share index (ASI) defied economic shocks posting an impressive return of 45.9% thereby outperforming most emerging and developed markets.
For context, the Year-to-Date returns in respect of the Morgan Stanley Capital International (MSCI) for Emerging Markets and Developed Markets were 6.8% and 18.5% respectively. With inflation rate in Nigeria at 28.2% as of November 2023, virtually all major sectoral indexes recorded positive real returns as disclosed in the NGX market report, including NGX Oil/Gas Index 125.54%, NGX Banking Index 114.90%, NGX Consumer Goods Index 90.93%, NGX Insurance Index 84.48% and NGX 30 Index 51.44%. However, NGX Industrial Goods Index underperformed the market at 12.86%
With a share price appreciation of 1022.9%, Transcorp Hotels emerged the best performing stock in the Nigerian stock market in 2023. Other notable high performing stocks include Chams Holdings 795.5%, Computer Warehouse Group 721.8%, MRS Oil 644.7%, Northern Nigeria Flour Mills 639.8% and Ikeja Hotels 471.4%. Much of the boost in stock market performance was witnessed in the second half of 2023 as the first half was characterized by cautious trading largely on account of the general election and the turbulent currency redesign exercise.
Indeed, market consensus attributes the biggest factor that lifted the stock market in 2023 to ‘market friendly policies’ of the new administration of President Bola Ahmed Tinubu namely the fuel subsidy removal and unification of exchange rates which were welcomed by the Bretton Woods Institutions and resulted in favourable rating by Moody’s in the second half of 2023.
Other factors that helped turbo-charge the stock market in 2023 were favourable crude oil price, impressive earnings of many listed companies (especially those in the financial services sector) as well as positive news regarding the plan by the CBN to implement another round of banking sector recapitalization.
On the flipside, a number of companies exited the market in 2023 starting with Ardova Petroleum which finally delisted in July. Others include Global Spectrum Energy Services and Union Bank following its acquisition by Titan Trust Bank. This is in addition to pending exits by companies like PZ Cussons, GSK and Capital Hotels- owners of Abuja Continental Hotel.
Gazing through my crystal ball, I see a stock market that will likely pull back in 2024 having attained a peak in 2023. The relatively low yield environment in 2023 acted like a tide that lifted all boats and under such circumstances, there is the tendency that a number of stocks may have been mispriced or priced above their intrinsic values. If history is any guide, market correction is bound to happen especially in the second half of 2024. I identify the following as major factors that will shape the performance of the Nigerian stock market in 2024:
Base Effect
The base effect refers to the impact that the starting point has on the progression of a particular variable over time. Essentially, it is the impact of a previous period’s performance on current comparisons. The computation of the return for 2024 will be by reference to the already high closing index of 74,773.77 for 2023. The base effect was at play in 2018 when the market plunged by 17.81% after it posted a 42% return in 2017. Ditto for 2021 when the ASI tanked by 6.7% after an unprecedented return of 50% in 2020. Hence by extrapolation, relative to the 2023 performance, stock market returns in 2024 will likely be lower.
Elevated Inflation
Inflation will likely remain elevated in 2024 chiefly from the impact of fuel subsidy removal. Inflation is forecast by the NBS to moderate to 21.4% in 2024. This is still a far cry from the CBN’s target band of 6% to 9%. It goes without saying that elevated inflationary pressures contribute to rising costs of production, erode profitability and shareholders’ value as well as dampen investors’ confidence.
Persistent Forex Challenge
For many businesses that depend on imported raw materials, difficulty in accessing forex is most likely to linger in view of the arrears of unmet forex demand which the CBN still grapples with. The CBN Governor is reported to have said that exchange rate pressures would reduce significantly in the 2024 against the backdrop of expected credit lines from Afreximbank and a consortium of banks. But these represent attempts to address the supply side of the market.
Until the demand side is taken care of, especially with the readmission of the 43 items to the forex market, the pressure in the forex market is not likely to abate substantially. To compound issues, foreign reserves is said to be at the lowest in six years with much of it encumbered by overdue short-term foreign obligations.
Little wonder the Economic Intelligence Unit (EIU) recently predicted, in its Africa Outlook 2024 report, that the naira would depreciate by 10% or more in 2024.
According to a recent report by Bloomberg, the naira fell 55% in 2023 to N1,043 per dollar at the official market as of Thursday December 28th 2023. Like the EIU, Bloomberg is also predicting that the naira will decline further in 2024. Against this backdrop, capacity utilization will likely be negatively impacted which in turn will affect bottom lines and ability of listed companies to pay dividends. The CBN has stopped banks from paying dividends from forex gains.
CBN’s Monetary Policy Stance
In view of the inverse relationship between interest rate and equities market’s returns, a major factor that will influence stock market performance in 2024 is CBN’s new monetary policy stance. In his speech during the dinner organized by the Chartered Institute of Bankers a few weeks ago in Lagos, the CBN Governor, Mr Yemi Cardoso, expressed confidence that “with continued tightening measures for the next two quarters, they will be able to effectively manage inflation”. As part of the tightening measures, the CBN had been carrying out “regular Open Market Operations (OMO) to mop up excess liquidity from the banking system”. The Bank had also removed “the cap on the remunerable Standing Deposit Facility (SDF) to increase activity in the SDF window and manage liquidity”.
It is a no brainer that aggressive tightening measures manifest in higher interest rates environment, make fixed income securities more attractive but shrink credit to the real sectors of the economy. Given that the impact of monetary policy comes with a lag, it should be expected that the full effects of the pace and scale of policy rate hikes in ‘the next two quarters’ will hit the economy in 2024. Tight monetary conditions will most likely weigh on near-term economic growth and dampen stock market performance especially in the second half of 2024. It is most likely that the CBN, following the advice of the IMF, will keep financial conditions tight to contain elevated inflation which implies limited upsides for the equities market. READ ALSO:
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For many businesses including listed companies, access to credit will pose a challenge in a rising interest rate environment.
Regrettably, forex challenges and insecurity will not allow high interest rates to support any meaningful flows from foreign investors in 2024. It bears mentioning that the supply-side and cost-push factors driving inflationary pressure in Nigeria, including energy costs and insecurity which are exogenous to the CBN, may deny the monetary authority victory over the war against elevated inflation in 2024.
GDP Growth Pace
In its world economic outlook, the IMF had reduced Nigeria’s GDP growth forecast from 3.3% to 2.9% in 2023 and 3.1% in 2024 respectively while the 2024 federal government budget projects GDP growth rate at 3.76% . The reality is that the challenging domestic business environment stemming from weak infrastructure, high exchange rate, and high cost of energy will continue to pose a drag to strong GDP growth rate. Perhaps, nowhere will this be made more apparent than in the manufacturing and agriculture sectors where growth rates have already begun to tank according to the National Bureau of Statistics GDP Q3 2023 report.
Against this backdrop, companies in the agriculture, industrial and consumer goods sectors may record depreciation in their share prices in 2024.
Crypto Market Threat
The Nigerian stock market will likely be exposed to competition from crypto assets in 2024 following the lifting of a ban imposed about two years ago by the CBN on cryptocurrency transactions in the Nigerian banking system. What is certain is that the face of the largely peer-to-peer market will change with increased banking support. So, investment in crypto-assets will likely spike in Nigeria in 2024 at the expense of retail investor participation in the stock market.
The 2024 Expansionary Budget
From a theoretical perspective, the implementation of an expansionary budget ought to turbo-charge the stock market as output expands with a positive pass-through to earnings of quoted companies. However, the 2024 federal budget of about N28.7 trillion is weighted more on recurrent expenditure ( N8.76 trillion non debt) and debt service (N8.27 trillion ) with a deficit of N9.18 trillion. This has grave implications for inflation and interest rates given that the huge budget deficit will be financed chiefly through borrowing. So, fiscal conditions may deteriorate which will likely attract downgrades by Rating agencies such Moody’s, Standard & Poor’s, and Fitch, negatively impacting confidence and stock prices. Already, recent reports say the National Assembly has approved that the government securitizes over N7 trillion outstanding Ways and Means in the federal government account.
It stands to reason that the more the government borrows to finance budget deficit; the more interest rates are driven up and as yields in the fixed income space go up, investors will naturally migrate from equities to government securities. More so, when government securities have the additional advantage of being risk-free. I foresee the yield environment in 2024 returning to the pre-COVID level and having a huge toll on the equities market. It is equally most likely that the adopted exchange rate of N800 to the dollar will be the major cause of wide budget variances in the 2024 budget on account of NAFEM operations. A volatile and high exchange rate will increase the cost of servicing external debt and further widen the fiscal imbalance.
On the upside, the Nigerian stock market will likely experience tailwinds arising from the following:
Global Economic Conditions/ International Crude Oil Price
The global economy proved more resilient in 2023 than predicted. In the US for example, unemployment rate has fallen to near multi-decade lows even as inflation has slowed down. In fact, inflation rates have continued to moderate in advanced economies like the Eurozone, the United Kingdom as well as emerging market economies. Global economic conditions will also be influenced by China, the second largest economy in the World.
According to PwC, China’s growth rate ‘will pick up in 2024 as private sector investment increase from this year’s low level and government measures to support the economy show results’.
Furthermore, international crude oil price is likely to stay above the 2024 budget reference price of USD77.9 per barrel on the average. Most reputable energy agencies as well as OPEC are bullish on crude oil price in 2024. For example, the US Energy Information Administration has a forecast of $93 per barrel for 2024.
Also, crude oil output is likely to shore up following government’s efforts at dealing with crude oil theft. The combined effect of these is that the oil sector performance is likely to improve in 2024 which should rub-off positively on oil companies listed on the Nigerian Exchange.
Outcome of the Presidential Committee on Fiscal Policy and Tax Reforms
The implementation of the report of the Presidential Committee on Fiscal Policy and Tax Reforms is expected to gain traction in 2024. This Committee is currently working on measures to improve the ease of doing business in Nigeria including through streamlining multiple taxes which impede investments in Nigeria. The outcome of the Committee’s work will likely boost activities in the stock market.
All said, other factors likely to have a positive influence on stock market performance in 2024 include the proposed Banking Sector Recapitalization. If the experience of 2005 is any guide, the recapitalization exercise is likely to rejuvenate the stock market. Also, the proposed listing of Dangote Refinery will help to deepen the stock market, if it crystalizes in 2024.
Overall, the investment environment in 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.
Uwaleke is Nigeria’s Capital Market Market Professor
