By Chuks Emele
Nigerian stocks ended the year on a high, posting a massive 94.83 percent gain from its April 26 low to become first among global equals.
On last day of trading, the Nigerian Stock Exchange gained 1.92 percent to close at 40,370.72 points, gaining 50.03 percent on the year to top 93 comparable exchanges around the globe, according to data published by Bloomberg News. It was the bourse best performance since 2013.
And it was a result largely achieved by error than by design, raising the question whether it will be possible to replicate the same error in 2021.
When President Muhammadu Buhari returned to office in 1919 after his first term, the market verdict was grim. The post-election stock market rally that had followed all Nigerian elections since 2003 (including his 2015 victory), was missing post-1919.
In the previous four years, the government had made up for the loss of oil revenue due to low prices and disruptions in the Niger Delta by simply borrowing more, selling bonds and treasury bills at high interest rates that drew local and foreign portfolio investors.
With debt service costs mounting, the Central Bank of Nigeria about a year ago brought a rule that barred non-financial institutions from a certain lucrative segment of the market, the Open Market Operations (OMO) bills.
This move locked out pension funds, corporate and individual investors and left the system awash with liquidity. It was a situation that spelled the low yields regime that came to pervade both fixed income and money market fund placements, further aggravated by the CBN decision to slash interests payable on savings deposits in September.
The stock market, for long ignored by investors and languishing, with many key stocks selling well below their real value, became an attractive option for investors. After the initial bearish sentiment that came with the coronavirus pandemic, leading to the lowest point reached on April 6 at 20,651.59 points, the market slowly revived.
By August its was galloping on a bull run, as yet even more investors flocked to the capital market. Now it’s breasted the tape ahead of all others.
So, can the market replicate the same results next year? That presupposes that the central bank will continue to restrict access to its OMO bills, that high liquidity and low yields will persist in fixed income and deposits, barring any further oil-price shocks or unforseen political event that could result in a dramatic fall in prices.
The stocks rally have generally ignored the deteriorating economic, security and political situation. Nigeria is going through its second recession in four years, still heavily reliant on crude oil at a time fossil fuels are obviously losing the attraction war with renewable.
Amid the deepening economic hardship hastened by the coronavirus pandemic, there’s a growing uncertainty about the ability of the government to steer the ship of state effectively. Large swathes of the countryside have fallen to armed groups, inuding Boko Haram insurgents and other armed, non-state actors that fall under the broad nomenclature of bandits. This has particularly hurt food supplies, making it the lead source of inflationary pressures.
At the same time, debt service costs are mounting with increased borrowing, at a point costing as much as 80 percent of government revenue. For 2021, 3.32 trillion naira will be spent on debt servicing, more than the sum voted for health, education and basic services. About 40 percent will go to recurrent expenditure, mostly the salaries and emoluments of public officials and civil servants.
And as the government relies more on taxes to fund spending and engages in more aggressive collection, expect raised hackles in most of the citizenry. Protests, riots and looting of the scale seen in the ENDSARS protests, that exposed underlying social equalities and anger, may become more frequent.
These are headwinds for investors to watch for while making decisions on which stocks to buy or not in 2021.