The Nigerian stock market has been on a ride lately, leaving investors and analysts wondering about the driving forces behind the surge in stock prices. Let’s delve into the factors contributing to this market frenzy and explore the potential implications for Nigeria’s economy.
What are the Factors?
The surge in stock prices can be attributed to a combination of factors, each playing a crucial role in shaping the current market landscape. Let’s explore some of them:
Renewed Investor Sentiment; Riding on the Bandwagon Effect
Investor sentiment is experiencing a revival, fueled by the bandwagon effect. The current surge is a result of renewed optimism, drawing more investors into the market. This creates a cycle where positive sentiment attracts more participants, further boosting the market.
As the earnings season approaches, the market is buzzing with anticipation. The impressive Q3 earnings have raised expectations for positive full-year results (especially the banks) and substantial dividend payouts; hence investors are strategically positioning themselves to capitalize on the potential gains, adding to the upward trajectory.
Dominance of Large-Cap Stocks: DANGCEM, BUACEMENT, and SEPLAT
The positive trend is closely tied to the performance of large-cap stocks like DANGCEM, BUACEMENT, and SEPLAT. Otedola’s purchase of 5 million units of Dangote cement triggered a rally that reverberated across the market, positively impacting stocks like BUACEMENT and WAPCO. However, lately, we’ve started to see that the few earnings results that have been released are also impacting the market. The likes of JAPAULGOLD, FCMB, and Royal Exchange, to mention a few, have released positive earnings that have also driven a positive market trend.
What are the implications for Nigeria’s Economy?
A flourishing stock market is more than just numbers on a screen; it has tangible implications for the broader economy.
Attracting Foreign Investment:
A positive market signals confidence in Nigeria’s economic prospects, attracting foreign investors eager to capitalize on the upward trend. Increased foreign investment injects capital into the economy, fostering growth and stability.
Encouraging Capital Formation:
The optimism in the stock market encourages capital formation for businesses. Companies are more likely to seek funding through equity, leading to increased investment in expansion, research, and development.
Is the Boom Sustainable?
While the current surge in stock prices paints a rosy picture, it’s essential to acknowledge the cyclical nature of markets. Market movements are rarely linear, and corrections are a natural part of trends – if it goes up it is bound to come down. Currently, we are seeing that the market is nearing a bubble burst. While the market has been closing positively lately, market breadth, which measures sentiment, has been declining.
We observe fewer stocks gaining compared to those losing, and we are already beginning to see some stock prices correct themselves. However, there is a need to clearly state that the top 8 most capitalized stocks in the Market (The Influencers) represent 73% of the whole Market while the next 12 most capitalized stocks (The Significant Ones); in addition to the top 8, represent 92% of the whole Market.
Hence, the individual performances of these top 20 most capitalized stocks have an impact on the performance of the Market. Hence, should be monitored closely as a price reduction in these stocks might have a ripple effect on the overall market.
How to stay afloat with this information?
- Firstly, it is advisable to be cautious and invest in fundamentally sound stocks.
- Constantly review your portfolio; if you’re in the green and have met your target, take profit, however, if you have positions still in the red, it may be prudent to hold.
- Invest in stocks with a track record of consistent dividend payout history.
Have more questions? Feel free to reach out to us via info@parthiansecuritiesng.com.
Contributed by Mercy Okon,
Research Analyst,
Parthian Securities Ltd.
