Nigerian Bourse: Sustaining The Bull Run

After recovering from a three-year decline to post a growth of 42.3 per cent last year, the Nigerian bourse is sustaining the momentum in the new year.

For three years, investors in the Nigerian stock market counted more losses than gains as the market declined. Specifically, the market fell in 2014, 2015 and 2016. Many investors, who could not stand the downward trend exited the market. However, the market made a significant rebound in 2017 and rose by 42.3 per cent.

Reviewing the performance of the market last week in Lagos, an elated Chief Executive Officer of Nigerian Stock Exchange (NSE), Mr. Oscar Onyema said: “Emerging from recession in the second quarter of 2017, Nigeria witnessed a rebound in investment activity which saw the NSE recover from the macroeconomic overhang of the commodity down-cycle, to become the third best performing market of 2017 globally.”

According to him, the market recovery was driven by several factors including: gradual economic recovery vis-à-vis improvement in global oil prices, domestic output and stronger foreign reserves engendering greater foreign portfolio investor (FPI) confidence; improvement in the ease of doing business (EOD) as Nigeria climbed 24 points in the World Bank EOD Rankings; and improvement in foreign exchange (FX) stability following favourable Central Bank of Nigeria (CBN) policies (e.g. Investor & Exporter window, SME lending window among others).

“Beginning in the first quarter of 2017, the CBN implemented a series of monetary policy actions and interventions to boost liquidity and drive convergence in the FX market. Newly created market segments helped ease demand pressures in the parallel market, resulting in a gradual reduction of the market spread from a peak of N217 (71.00 per cent) in February to N57 (18.63 per cent) as at December 2017. Optimism over Nigeria’s economic recovery also contributed the MSCI’s decision to retain Nigeria in its Frontier Market Index at its June 2017 Index Review,” he said.

NSE equity market performance
Looking at the equity market activity in 2017, it skyrocketed from 2016 levels, as market turnover increased by 121 per cent to N1.27 trillion, N575 billion in 2016. For the second consecutive year, domestic investment flows outweighed FPI flows, albeit marginally.
Overall, the domestic retail segment recorded the least growth during the year. As at November 2017, the value of domestic retail trade totaled N364 billion which represents a modest increment of 39 per cent from the previous year, compared with the triple-digit growth recorded in all other investor classes.

“Reviewing FPI trends for the year, we note that foreign inflows outpaced outflows in 2017, with positive net flows sustaining from March 2017, and peaking in August 2017 on the back of positive economic data releases such as the second quarter GDP report and rising PMI readings,” Onyema explained.
However, initial public offering (IPO) activity in 2017 remained mute, although there were several other positive indicators including the revival of supplementary listings and the return of new issuances.
“The market saw a nine fold increase in the value of new issuances, buoyed by Merger & Acquisition (M&A) transactions, listings by introduction, rights issues and others, bringing the total value of equity issues in 2017 to N408 billion,” the NSE boss said.

In terms of indices performance, the NSE Banking Index emerged as the NSE’s top performing index of 2017. Buoyed by strong corporate earnings reports by the sector’s key players, the index posted returns of 73.32 per cent. Coming in a close second with one-year returns of 70.33 per cent, was the NSE Pension Index, which tracks the performance of the NSE’s top 40 companies by market capitalisation and liquidity, in accordance with National Pension Commission (PENCOM) guidelines. The Premium Board continued to demonstrate the appeal of strong, transparent listed companies to global investors, closing as the third best performing index of the year with 51.23 per cent returns. The NSE Consumer Goods and Industrial indexes also delivered strong performances as the FX market gained momentum. All other NSE market indices recorded positive returns except the ASeM, which posted a decline of 8.90 per cent.

NSE bond market performance
The NSE fixed income market recorded mixed performance. New bond issuances increased over the previous year; bond yields gradually moderated from 2016 levels amidst easing inflation and greater FX stability. Yields across various tenors declined between 0.4 per cent – 1.5 per cent and market turnover declined by 26 per cent in 2017, as investors sought higher returns in alternative product classes.
But bond raising activity was dominated by the Federal Government of Nigeria (FGN), as it continued to leverage the capital market to finance the MTEF and rising fiscal deficits.

According to Onyema, “The year 2017 saw the listing of the $1.5 billion FGN Eurobond which was approximately eight times oversubscribed in international capital markets. Other pioneer issuances during the year included the: maiden five -year, $300 million FGN Diaspora Bond; N100 billion FGN Sukuk bond; and the record-setting N10.69 billion FGN Green Bond, which is the first Green Bond issued by an African Sovereign and the first Climate Bonds Certified Sovereign Bond ever issued.”

Conversely, the domestic corporate bond market saw a slowdown in activity relative to 2016 with corporates raising N21.5 billion in three listings in 2017, representing a 75 per cent decline from N86.1 billion recorded in 2016.

NSE strategy execution in 2017
Although the growth recorded in 2017 was significantly influenced by external factors, most of the investors were equally attracted by the strategies introduced and executed by the NSE aimed at enhancing the market performance.

Onyema explained the Exchange made steady progress within its strategic focus areas set out at the beginning of the year. “Demutualisation remained a chief strategic focus for 2017.

Through targeted engagement efforts with our members, Securities and Exchange Commission (SEC)EC, National Assembly and Corporate Affairs Commission (CAC) and other key stakeholders, we achieved the broad-based support required to secure approval for demutualisation from the exchange’s members and successfully progressed the Demutualisation Bill through the reading and public hearing stages of the law making process.

As articulated in the Bill, it is anticipated that the demutualisation of the NSE will further catalyse the development of a dynamic, transparent and efficient capital market, which is critical to Nigeria’s socio-economic development,” he said.

The NSE boss added that they amplified our efforts to establish West Africa’s first exchange traded derivatives (ETD) market and achieved a number of key milestones during the year.
“These include the: completion of draft rules; development of product specifications; and market-wide trainings on derivatives and Clearing Counterparty (CCP) transactions. We also worked to create and enhance legal and regulatory frameworks which support derivative instruments, and have made significant progress towards securing approvals to operationalise these frameworks. We believe that these efforts have positioned us past the most significant roadblocks on the path towards an ETD market,” he said.

Onyema disclosed that the exchange also recorded other achievements in 2017 such as the launching of the NSE’s educational institute in June 2017(X-Academy) to empower financial market professionals in Africa.
Others are: Continued phased implementation of SEC/NSE pricing recommendations. NSE’s hosting of inaugural Sub-Saharan REITs conference; Green bond conference; market data workshop; and derivatives conference; ramped up engagement with key stakeholders (both public/private sectors and domestic/international) to promote market-friendly policies and drive development of the capital market.

NSE 2018-2021 strategic plan

Having recovered from the three-year decline and recorded a major leap in 2017, that performance has to be sustained. This means there must be strategies to ensure that is achieved. Onyema said in keeping with its object of taking a vigorous and adaptive approach to strategy execution, the NSE re-assessed its strategic agenda in light of changing dynamics in both the operating environment and the global exchange landscape against the backdrop of the fourth industrial revolution.

“This culminated in a new corporate strategy for the 2018 – 2021 period. In redefining its strategic ambitions, the NSE selected three key focus areas to pursue to enhance our global competitiveness and appeal to stakeholders. They are based on: satisfying our customers; boosting our retail segment penetration and enhancing our organisational agility,” he said.

In area of enhancing customer focus, he said the NSE is taking a greater focus on “delighting” its customers across the value chain.
He said: “We are committed to better understanding and meeting our customers’ diverse needs by leveraging adaptive new technologies, and will be carrying out a series of activities aimed at supporting this objective. Focusing on retail investors, the exchange will increase its focus on growing retail participation as a key component of a well-functioning and resilient market.

To this end, we will be partnering market stakeholders to deliver a number of financial literacy and investor outreach initiatives which align with existing plans (such as the Capital Market Master Plan and the National Financial Literacy Plan); as well as undertake new initiatives that can help drive a more radical change. At the crux of our efforts, is the establishment of a Retail Coverage Department, which will be dedicated to the development and publicity of simple, affordable and efficient investment products and services that can effectively support the Nigerian populace – at various stages of financial mobility – to create durable wealth.”
He added that the exchange is restructuring to drive its new corporate strategy.

“There are a number of new departments that have emerged to support our evolving strategic ambitions, which are primarily geared towards innovation, emerging technologies and retail participation. We are optimistic that the new structure will support us to better execute on our 2018- 2021 Strategic Plan, enhance organisational dynamics and achieve new efficiencies as we demutualise,” he said.

Outlook for 2018
Looking ahead, Onyema said the outlook for the Nigerian capital market is encouraging.
He said although to some extent, political activities and currency movements will have an effect on the market, but they expect that such impacts will be short lived and the performance of the underlying business activities will ultimately determine market performance.

Onyema added: “On its part, the NSE is on track to become a more agile and flexible demutualised securities exchange. We are hopeful that the Demutualisation Bill will be signed into law in 2018, and are working assiduously with our Advisers to fine-tune outstanding aspects of the demutualisation project as well as providing clarity on the process via regular engagement with all our valued stakeholders. We expect that the year ahead will also see the launch of exchange-traded derivative instruments.

This will not only help us meet our objective of facilitating order flow across various asset classes; but will offer our ever-increasing community of domestic and global investors a greater array of products to diversify and manage risk. We will also continue to engage with the government on privatization and listing of state owned enterprises. We plan to maintain our role as an advocate for the adoption and implementation of market friendly policies required for sustainable economic growth.

X-Academy will continue to be at the forefront of driving capacity building across Nigeria and the rest of Africa. Given the growing demand for innovative products and solutions, the NSE will leverage on its network and knowledge to take Africa’s financial markets to greater heights.”