Factors Contributing to Stock Market Rally

June 9, 2017
Factors Contributing to Stock Market Rally

Factors Contributing to Stock Market Rally

By Modupe Gbadeyanka

The recent rally in the equity market has opened a window for the quoted companies to raise equity capital to finance their expansion projects. The bearish trends that dominated the equity market in the last few years have caused many companies to abandon the market as a source of raising long-term capital.

The Nigerian Stock Exchange All Share Index (NSEASI), which measures the performance of the equity market, appreciated by 20% between March 06, 2017 and May 31, 2017. A large proportion of this gain occurred in the last four weeks, as the Index appreciated by 15.13% between April 26 and May 31, 2017.

The Year-to-Date (YTD) return on the NSEASI as at May 31, 2017 stood at 9.76%. Although the return on the NSEASI is lower than the inflation rate of 17.24% as at April 2017 and the average YTD yield of 22.95% on the 364-Day Nigerian Treasury Bill (NTB), the returns on most of the highly capitalised stocks are higher than the inflation rate and the average yield on the 364-Day NTB.

The factors responsible for the appreciation in the equity market include the improvement in the Q1, 2017 results of quoted companies compared with the corresponding period of last year and the prospect of better performance in subsequent quarters.

Other factors include the increase in the supply of foreign exchange, improved crude oil production and price, improved investors’ confidence in the Nigerian economy and the financial market, increase in the participation of both the local and foreign investors in the markets and the boost to the economy by the passage of the Petroleum Industry Governance Bill (PIGB).

The sectoral analysis of performance of the equity market in the first five months of the year 2017 shows that the Banking sub-sector recorded the best performance, followed by the Insurance, Industrial and Consumer Goods sub-sectors.

The NSE Banking Index gained by 30.70% as at May 31, 2017; the NSE Insurance Index gained 9.77%; the NSE Industrial Index gained 9.15%, while the NSE Consumer Goods Index gained 2.97%.

Meanwhile, the NSE Oil and Gas Index lost 5.45% of its value in the period under review. As at May 31, 2017 the share price of Oando recorded a strong return of 80%, mainly due to the news of the signing of a Memorandum of Understanding (MoU) with the Federal Government of Nigeria (FGN) to manage the Port Harcourt Refinery.

Stanbic IBTC Holdings, UBA, GT Bank, Access Bank, and Zenith Bank all recorded impressive appreciation in their share prices on the strength of the impressive Q1 2017 results the banks announced. Although the profitability of FBN Holdings dropped in Q1 2017 compared with Q1 2016, the ongoing clean-up of its nonperforming assets sends a positive signal that the worst may be over. Transnational Corporation of Nigeria’s share price also recorded impressive appreciation as a result of the favourable Q1 2017 result the company announced.

There are indications that the company will benefit from the FGN intervention fund for the power sector.

The lull in the equity market in the last few years has paralysed equity capital raising exercise in the capital market. Quoted companies opted for debt capital to finance their expansion plans even in situations where the debt capital option was not the most appropriate. Some companies also sourced capital from abroad despite the exchange rate risk.

The recent economic challenges and the high interest rate on debt securities in Nigeria have imposed limitations on companies’ ability to issue debt capital to fund expansion. As the economy is gradually exiting the current recession, there would be a need for companies to expand production capacities.

Thus, the current rally in the equity capital market offers a great incentive for quoted companies to access the market to raise the needed equity capital for their expansion projects. As activities increase in the primary market segment of the equity market, the demand for debt capital may drop.

Consequently, we expect the interest rate and yields on the fixed income securities to drop.

Source: FSDH Research

Modupe Gbadeyanka

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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