Nigeria’s new cautious monetary policy stance, a guiding light for the central bank on its road to holding rates for the first time in years last week, could be a spur for stocks in the near term.
Analysts envisage that the development would trigger stronger inflows into the market at any moment starting in March.
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Yields on fixed-income assets had progressed on a steady growth curve in the recent past. That made 2024 a banner year for bonds and treasury bills and the Nigerian credit market a honeypot for external investors seeking promising havens for smart money.
Now, yields are steadily retreating, and the prospect that decades-high inflation levels in the economy are beginning to ease may quicken their descent. This means that attention is being directed toward shifting to stocks as a viable, timely alternative in the months ahead.
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The vote to retain the reference rate at 27.5 per cent on Thursday until the next meeting of the monetary policy committee leaves a rate cut on the cards when it reconvenes in May.
And the chances that rebased official data, beginning next month, will show inflation slowing down could be a disincentive for international investors bringing in dollars to invest in Nigerian debts.
Fixed-income yields tend to fall when inflation drops as investors typically won’t have reasons to demand higher interest rates for investment, which they otherwise would have asked for to compensate for the adverse impact of inflationary pressures on the purchasing power of their investment during periods of high inflation.
“Generally, there is going to be a redirection of funds from the fixed-income market to the equity market because investors now will then see that there is probably much more value in the equity market,” Matilda Adefalujo, economic research analyst at Meristem Securities, told PREMIUM TIMES.
Her comment followed the government’s auction of treasury bills on Wednesday, which sold the 364-day bill at the lowest yield since January 2024.
Equities are off to a vibrant start this year, with Nigeria’s main stock index up by 5.4 per cent, driven by bank stocks. Conglomerate Chellarams, as well as miller and pasta maker Honeywell Flour, are leading gains.
The index tracking Nigerian Exchange’s top thirty companies by liquidity and market capitalisation, the so-called “NGX 30”, has likewise gained 5.9 per cent.
The significant boosts include the positive sentiments around banks’ capital raise activities in response to a March 2026 recapitalisation and, to an extent, buy pressure induced by companies’ broadly impressive full-year 2024 financial results.
For Great-David Oluwasipe, a Lagos-based portfolio manager of pension funds, the stimulus the market is set to garner from fixed-income outflows will be anchored largely on major companies that are on track to issue their full-year results.
He is upbeat that the performance of big lenders will turn out strong, putting them on track as a destination for investors looking to unlock value.
The positive sentiment the good results of those financial institutions can generate may turbocharge the current upturn in the market beyond the present, the investment manager said.
The audited reports of United Bank for Africa, Guaranty Trust Holding Company, Access Holdings and Zenith Bank are due next month, just as the investing public is looking for those of mega-cap corporations like Seplat Energy and Dangote Cement.
“The governance structures around reporting for banks are a bit more standardised. So it’s easier for offshore investors or investors, in general, to gauge the financial health based on the reporting on the banks particularly. That will be a very, very important determinant in how people start to move in,” he told PREMIUM TIMES.
“I think there is starting to be trickles of interest, but it is not as material as I know it’s going be. I think for most of the people, the trigger will be the release of full-year results,” he added.
He is convinced Nigerian stocks are severely undervalued relative to African peers, especially when the price-to-book (PB) ratios and other key valuation ratios are considered, making them a potential attraction for foreign portfolio investors.
Bank stocks hold out strong prospects
A raft of bank stocks quoted in Lagos still carry strong fundamentals but have been trading below their intrinsic value for longer than expected, because the market sentiment needed to propel their prices up has not really been there, making them underpriced compared to other sectors.
Last year, banking reported the least gain of the five sector indexes tracked by the Nigerian Exchange, returning less than 21 per cent compared to industries such as oil & gas and insurance, which yielded as much as 160 per cent and 123.2 per cent, respectively.
At the moment, all of Nigeria’s five biggest lenders in asset terms, together with Wema Bank and FCMB Group,, have a price-to-earnings ratio (a valuation metric that shows how cheap a stock is by measuring its share price in proportion to its net profit) that is under 2.
The Nigerian stock market has an average PE ratio of 9.2x.
The lower the PE ratio of a company, the more undervalued analysts and investors consider the stock to be compared to its earnings and the more attractive it is for investment.
Eight of the listed banks have a PB ratio (a metric that compares the share price of a company with its net assets or shareholders’ funds) that is below 1, implying they are currently trading below their book value.
Many portfolio managers, Mr Oluwasipe said, are not close to their maximum risk on equities. He is hoping that asset managers will begin to prioritise equity positioning.
Unlike bonds and treasury bills, Nigerian stocks have not regained the level of interest they drew from overseas investors in the pre-pandemic days before a dollar squeeze put a good number of such investors to flight.
For instance, the contribution of foreign portfolio investment to the country’s equity market averaged 48.1 per cent in the four years to 2019, according to the Domestic & Foreign Portfolio Investment Report of Nigerian Exchange Limited. That compares to 16.5 per cent for the years from 2021 to 2024.
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“I think the equity market is in for a ride. Now that the yields in the fixed-income market are just the way they are, they are dropping. The equities market will be the go-to place for portfolio managers,” said Oladayo Akinfolarin, an investment analyst at Afrinvest (West Africa).
He told PREMIUM TIMES that he and his team at the investment bank are betting that there will be more traction towards insurance stocks, given the recent regulatory directive that will increase the minimum capital of insurers.
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