By John Ikani
Nigeria is embarking on a series of bold economic and foreign currency reforms, a move that has rekindled interest among investors in the stock market.
The NGX All Share Index is approaching levels not seen since 2008, thanks to President Bola Tinubu’s government decision to eliminate costly fuel subsidies and devalue the naira.
The banking sector has emerged as the primary beneficiary, experiencing a remarkable 23% surge in shares last month, the highest increase since 2018.
However, not all companies have fared equally well during this period. Dangote Cement Plc experienced a 1.7% decline in June due to the escalating gasoline prices, which have nearly tripled in the past month, placing pressure on transportation and manufacturing sectors.
The recent gains in the stock market have primarily been driven by local investors seeking to safeguard their savings against relentless inflation.
Economists at Bank of America Corp. predict that the country will need to raise interest rates by a minimum of 700 basis points before the year concludes to tackle the projected 30% inflation rate.
Looking ahead, there is speculation that these reforms may eventually entice more international investors.
Segun Adams, an equity analyst at Afrivest West Africa Ltd. in Lagos, suggests, “People are positioning themselves in banks ahead of the expected return of foreign portfolio investors, who will want to take advantage of the benefits.”
The Nigerian government estimates that fuel subsidies were costing the state $10 billion annually.
Nigerian banks are set to profit from their holdings of US dollars, which have become more valuable following the naira’s depreciation.
Since June 14, the currency has plummeted by almost 40% against the US dollar, as reported by Lagos-based FMDQ.
Joshua Odebisi and Titilayo Lawani, analysts at RMB Nigeria Stockbrokers, believe that “the devaluation will positively impact bank balance sheets, with assets expected to increase by as much as 15% solely due to the exchange rate difference.”
Certain oil stocks have also witnessed gains due to the removal of fuel subsidies.
TotalEnergies Marketing Nigeria Plc has nearly doubled its value this year, while Seplat Energy Plc has surged over 20%.
Nonetheless, it will take time for foreign investors to regain confidence in Nigerian markets amidst the ongoing economic turbulence.
Their decisions may be influenced by index provider MSCI Inc., which is currently contemplating whether to exclude Nigeria from its Frontier Market indexes and reclassify it as a Standalone Market.
Malcolm Dorson, portfolio manager at Global X Management, points out, “If you are a dollar investor, you will need to consider the weakness of the naira.
It is crucial to have a strong level of confidence in the government’s ability to sustain these reforms going forward.”
