Nigerian stocks are headed for their highest annual gain in seven years riding on low yields in the country’s fixed-income market.
The equities benchmark index in Africa’s largest economy recorded its highest return, rising 45.7 percent this year, the most among 93 equity indexes tracked by Bloomberg. It’s the world’s best-performing stock market year-to-date.
According to Bloomberg News, investors’ appetite for riskier assets has remained strong due to persistent low yield on fixed-income instruments, Chapel Hill Denham said in a note to clients on Tuesday. This has been buoyed by traders positioning for Dangote’s share buyback program due this week.
Equities will continue to outperform bonds in 2021 given the current overstretched fixed-income valuations, according to Chapel Hill Denham.
The Lagos bourse gained 0.75 to 39,110.17 to reach its highest level since June 2018.
According to the exchange, equities continue to respond positively to macroeconomic policy changes such as the cut in Monetary Policy Rate by 100 basis points from 12.5 percent to 11.5 percent by the Central Bank of Nigeria in September 2020.
“It has also been observed that investors are targeting Nigerian companies with strong fundamentals with the expectation that they will best overcome the onslaught of COVID-19 and be able to distribute dividends to shareholders. This is particularly important given the low-interest-rate and negative real yield environment”.
Mr. Lukman Otunuga, Senior Research Analyst at FXTM, a global online financial trading and investment firm in a chat with our correspondent said the development was based around investors hunting for profit at a time where the country’s fixed income market is offering negative real yields.
“While the capital market could push higher in the near and even benefit from external forces like Biden’s victory and a potential cure for COVID-19, gains are likely to capped by Nigeria’s domestic economic conditions,” he said.Analysts at Greenwich Trust Research said, “The market will likely remain upbeat buoyed by end-of-year portfolio re-balancing by fund managers, or even the ‘Santa-Rally’. We, however, do not rule out intermittent profit-taking that could slow down the uptrend in the market.”
Similarly, analysts at Cordros Research said in the short term, they still see scope for expansion in valuation multiples as the hunt for alpha-yielding opportunities, in the face of increasingly negative real returns in the fixed income market, remains positive for stocks.