Nigerian Stocks Hit Four-Week Low as Investors Take Profits

The market value of Nigerian equities fell to a four-week low on Monday as investors continued to lock in gains following a strong rally that briefly made the Nigerian Exchange Limited (NGX) the world’s best-performing stock market.

Market capitalisation of the NGX fell to N156.5 trillion, its lowest level since July 16, when it stood at N156.2 trillion, according to NGX data. It was N156.6 trillion at the close of trading on Friday.

The NGX All-Share Index also declined to 242,454.7 points on Monday from 242,639.2 points on Friday.

The latest pullback comes after the west African nation’s stock market slipped to third place globally in dollar terms, behind South Korea and Ghana, after briefly taking the world’s top-performing spot on July 10.

As of August 14, South Korea’s Kospi had gained 68.52% year to date in dollar terms, compared with 66.68% for Ghana’s Composite Index and 65.23% for the NGX All-Share Index, according to Bloomberg data tracking 92 global stock exchanges.

Nigeria’s loss of the global crown, however, has been driven largely by the sharp rebound in South Korean equities rather than a collapse in the Nigerian market.

The Nigerian market has also come under profit-taking pressure after its strong run, with analysts describing the recent decline as a normal correction rather than a broad deterioration in market fundamentals.

The domestic equities market fell 1.2% week-on-week last week to 242,619.20 points, reversing the gains recorded in the previous week.

The market advanced in only one of five trading sessions, moderating its year-to-date return to 55.9%, from 57.8% in the preceding week.

Despite the decline in prices, trading activity strengthened significantly. Total volume and value traded rose 126.8% and 26.6% week-on-week, respectively, to 12.2 billion shares and N176.1 billion.

Analysts at CSL Research maintained a cautiously positive outlook on the domestic bourse.

“The recent pullback appears to reflect profit-taking following the strong rally in preceding weeks rather than a broad-based deterioration in market fundamentals,” they said in a note on Monday.

They expect investor sentiment to remain supported by the ongoing release of corporate earnings and continued corporate actions.

However, elevated valuations, recent profit-taking and the availability of Open Market Operations bills to retail investors could sustain near-term volatility as investors rotate some capital into fixed-income securities, CSL Research said.

Naira stability supports dollar returns

The recent correction comes against the backdrop of a significant improvement in the naira’s performance, which has helped Nigerian equities deliver strong returns when measured in US dollars.

By August 14, the average official exchange rate had strengthened to about N1,357.7/$, its strongest level in two months.

Data from African Markets showed that the naira was the second-best-performing currency among 17 African currencies against the dollar year to date as of August 16, with a gain of nearly six percent 

The relative stability of the currency is significant for foreign investors because gains in local equities can otherwise be eroded by currency depreciation when converted into dollars.

Nigeria’s market rally has also been supported by stronger corporate earnings, foreign-exchange reforms, banking recapitalisation, higher dividends and increased domestic investor participation.

Ray Ndlovu, Bloomberg’s emerging markets reporter, said domestic investors accounted for about 89% of participation and transactions on the Nigerian market during the first half of the year, compared with 11% for foreign investors.

“It’s in fact local investors that are driving the gains that are being translated on the exchange there,” Ndlovu said.

Foreign investors, he said, are still watching to see whether reforms in Nigeria and other African markets prove durable before deploying more capital.

The distinction could become increasingly important as the market enters a period of consolidation following its strong rally.

Domestic investors may be driving the gains, but foreign investors could determine whether the rally becomes a sustained repricing of Nigerian assets.

For now, the latest decline appears to be more about investors securing profits than abandoning the Nigerian market.

The combination of strong earnings, relative currency stability and ongoing reforms continues to support the broader investment case, although elevated valuations and competition from fixed-income instruments could keep the market volatile in the near term.