Nigerian equities are emerging as top performers in the Europe, Middle East, and Africa (EMEA) region for 2024, with the 151-member NGX All-Share Index recording an 11% surge in local currency, second only to Argentina globally.
The impressive gains, particularly in the past year, have been fueled by pension funds and institutional investors, drawn by the anticipation of record profits from banks capitalizing on revaluation gains from foreign-exchange positions.
The NGX has experienced a remarkable 60% climb over the last 12 months, overshadowing the less than 2% advance of the MSCI Emerging Markets EMEA Index during the same period.
Notably, banking stocks have been the driving force behind this growth, with the banking index showing a 16% increase this year and an impressive 140% surge over the past 12 months.
Prominent banking entities such as Access Bank PLC’s holding company, Zenith Bank PLC, and Guaranty Trust Holding Co. have all contributed to the sector’s success, with gains ranging from 12% to 21% in 2024.
The banking index currently trades at a price-to-estimated earnings ratio of 2.24 times.
The profitability of Nigerian banks is largely attributed to substantial gains from the devaluation of the naira. While the Central Bank of Nigeria (CBN) has advised banks against using these gains for dividend payouts, investors, such as Emerging Markets Investment Management Ltd.’s Ayodele Salami, believe that some gains might eventually be passed on to shareholders through avenues like bonus issues.
Negative real yields on the country’s fixed-income securities have further increased the attractiveness of equities in Nigeria, with the Central Bank selling one-year treasury bills at a yield of 8.4%.
This yield is significantly lower than the inflation rate of 28.2% in November, making equities a more lucrative option.
Local institutional investors, including pension funds, are strategically increasing their equity investments to enhance income in a landscape where alternatives are limited. Usoro Essien, head of research at RMB Nigeria Stockbrokers, notes that a scarcity of alternative investment options is influencing a shift towards equities, particularly as pension funds take longer-term views on equity investments.
With Nigerian lenders set to release their 2023 financial reports and dividend plans in the coming months, the outlook for the equity market remains optimistic.
