By Professor Uche Uwaleke
For investors in the Nigerian stock market, the year 2022 represents an improvement over 2021 in terms of nominal price appreciation. As of Friday 30th December 2022, although still below the November inflation rate which printed at 21.47%, year-to-date return climbed to 19.98% compared to 6.7% recorded in 2021, outperforming many frontiers and emerging markets. Much of the boost in stock market performance, in the first half of 2022 with a return of 21.3%, came from the Oil and Gas Sector on the back of strong crude oil prices as well as the performance of high-cap stocks that make up the NGX Premium Index, Banking Index and Industrial Goods Index especially in the last quarter of 2022, owing chiefly to favourable corporate earnings.
Selected Indexes and Returns as of December 30 2022
|NGX All-Share Index (ASI)||4.54||19.98|
|NGX 30 Index||5.47||6.98|
|NGX Premium Index||6.24||13.14|
|NGX Banking Index||10.10||2.81|
|NGX Insurance Index||3.42||-11.99|
|NGX Consumer Goods Index||0.73||-0.06|
|NGX Oil/Gas Index||-9.01||34.05|
|NGX Industrial Goods Index||35.53||19.67|
The lagged effect of the CBN’s policy rate hikes manifested in the third quarter of 2022 just as I had predicted in my 2021 article on ‘crystal-gazing the Nigerian stock market in 2022’. In it, I noted that ‘’To support economic recovery, the CBN has maintained what can be described as an accommodative monetary policy stance since September 2020 when the MPR was reduced by 100 basis points to 11.5%. This stance will likely change in 2022 as policy becomes more hawkish induced by both endogenous and exogenous factors’’. Need I say that this prediction hit the bull’s eye?
To put it in perspective, between May 2022 and November 2022, the Monetary Policy Rate was jerked up by 500 basis points- from 11.5% to 16.5%, all in a bid to tame inflation. This brought a halt to the stock market momentum witnessed in the first half of 2022 as investors began to take advantage of the rising yield environment in the fixed-income market. Little wonder, the NGX All Share Index shed 5.39% in the third quarter of 2022 to close at 49,024.16 points from 51,817.59 points on July 1, 2022. Stock prices resumed upward movement in November when the NGX ASI gained over 8% sustaining the momentum all through December to close the year on a positive note. Surprisingly, this came amid a further rate hike by the CBN in November and higher headline inflation. How was the stock market able to shrug off these twin headwinds? Could the announcement, in late October, of a currency redesign by the CBN have triggered the market in November? Well, the jury is still out in Customs Street Lagos.
Gazing through my crystal ball, I identify the following as major factors that will shape the performance of the Nigerian stock market in 2023:
The conduct of the 2023 general election and its outcomes will have a major impact on investors’ confidence not least because of the elevated risk that is associated with elections in Nigeria. This is why I do not see the current bullish trend sustained through the first quarter of 2023 when cautious trading and profit-taking are likely to assume center-stage. History indicates that in an election year, several foreign investors do seek safety in other emerging markets and may return sometime after the election if it is largely adjudged to be credible by the international community. Owing to this flight-to-safety inclination, government securities will most likely offer the most opportunities and become the toast of investors during the first half of 2023.
CBN’s Monetary Policy
Given that the impact of monetary policy comes with a lag, it should be expected that the full effects of the pace and scale of policy rate hikes in 2022 will hit the economy in 2023. Tight monetary conditions will most likely weigh on near-term economic growth and dampen stock market performance, especially in the first half of 2023. It is most likely that the CBN, following the advice of the IMF in the Article IV consultation with Nigeria, will keep financial conditions tight to contain inflation which implies limited upsides for the equities market. Regrettably, political uncertainty and insecurity will not allow high-interest rates to support any meaningful flows from foreign investors in H1 2023.
As a result, I expect economic activity to decelerate in Q1 and Q2 of 2023. Perhaps, nowhere will this be made more apparent than in the manufacturing and agriculture sectors where growth rates have already begun to the tank according to the National Bureau of Statistics GDP Q3 2022 report. Against this backdrop, companies in the agriculture and consumer goods sectors may record depreciation in their share prices during these periods. In general, CBN’s tightening stance in the first half of 2023 will largely contain stock market gains. It bears mentioning that the supply-side and cost-push factors driving inflationary pressure in Nigeria, including energy costs and insecurity which are exogenous to the CBN, will likely deny the monetary authority victory over the war against inflation as the expected impact of the implementation of currency redesign and cash withdrawal limit on inflation and exchange rates may not crystalize in the near-term.
Implementation of the 2023 Expansionary Budget
From a theoretical perspective, the implementation of an expansionary budget ought to turbo-charge the stock market as output expands with a positive pass-through to the earnings of quoted companies. However, the 2023 federal budget of about N21.8 trillion is weighted more toward recurrent expenditure (N8.32 trillion) and debt service (N6.55 trillion). This has grave implications for inflation and interest rates given that the huge budget deficit will be financed chiefly through borrowing. So, fiscal conditions may deteriorate which will likely attract downgrades by Rating agencies such as Moody’s, Standard & Poor’s, and Fitch, negatively impacting confidence and stock prices. A related issue is the government’s plan to securitize over N23 trillion government debt owed to the CBN. What all these portend is a high-interest rate environment in 2023 which will not augur well for the stock market.
Fuel Subsidy Removal
Regarding the outlook for the economy in 2023, a determinant of stock market performance, the elephant in the room seems to be the issue of fuel subsidy which the 2023 budget has only accommodated up till June. How the new administration navigates the challenges that will come with its removal lie at the heart of macroeconomic stability in the second half of 2023. Negative investor sentiment, on the part of both domestic and foreign investors, will prevail in the stock market if fuel subsidy removal leads to social unrest and strikes by labour unions. Therefore the government should begin in earnest to engage relevant stakeholders, effectively communicate with the public as well as agree to compensation measures with organized labour to ameliorate its direct impact and unintended consequences. The planned take-off of the Dangote refinery offers a silver lining, but it is not clear from my crystal ball whether this will translate to a significant reduction in fuel imports in 2023.
Implementation of the Revised Capital Market Master Plan
On the upside, the implementation of the revised Capital Market Master Plan (2021-2025) expected to kick in from 2023 may buoy market performance, especially in the 2nd half of 2023. Given that the Federal Ministry of Finance, Budget and National Planning is the implementing ministry and has been charged with the responsibility for its successful execution, it is expected that, unlike what was obtained in the past, the Ministry will drive it as part of the national economic policy agenda.
If that is done, sectors like ICT (MTN, Airtel), Agriculture (Okomu, Presco), Industrial (Dangote Cement, BUA cement), Oil and Gas (SEPLAT, MRS) and Financial Services (Zenith, GTCO) may benefit from increased investors participation in H2 2023 on the back of the revised plan which seeks to achieve significant participation of Institutional (especially pension funds, Insurance companies, mutual funds) as well as retail investors in the stock market.
US Economy and Federal Reserve Policies
Contrary to fears being expressed in certain quarters, the US Economy is not likely to go into recession in the near term if recent monthly US Bureau of Labor Statistics data is any guide. The US job market appears strong and tight with high job openings. According to the BLS, the unemployment rate stood at 3.7% in November 2022. What this means is that the labour market has been surprisingly resilient despite efforts by the Federal Reserve to cool the economy, stoking concerns of higher inflation.
Although inflation is slowing, (US inflation in November was 7.1% down from 7.7% in October), the reason the Fed hiked rates in December by just 50 basis points, worries about a resurgence in inflationary pressure will likely bug the Fed for quite some time especially given the escalating Russian Ukraine conflict and its impact on energy costs in the US. Against this backdrop, the US Central Bank is reported to have projected at least an additional 75 basis points increase in borrowing costs by the end of 2023. This development has the potential of increasing bond yields leading to capital flow reversals in frontier and emerging markets. So, Nigeria should expect further capital outflows as a consequence, which will hurt the stock market, especially in H1 2023.
At another level, the rise in US interest rates and bond yields will make it more expensive for the government to service the huge public debt now more than N42 trillion especially the foreign debt with a significant Eurobonds component. This development will worsen the current fiscal imbalance, jeopardize the 2023 budget as well as crowd out development funds. Having gone through this route before, both the fiscal and monetary authorities should anticipate the fallout of monetary policy tightening by Central Banks in developed economies and put in place measures to cushion the adverse impact on the Nigerian economy.
International Crude Oil Price
This has become, a legacy factor for an economy that depends on crude oil sales for much of its forex and government revenue. Fortunately, the international crude oil price is likely to stay above the 2023 budget reference price of USD75 per barrel on average. To be sure, the Energy Information Administration (EIA) forecast is to the effect that Brent crude oil prices will average USD95.33 per barrel in 2023 due in part to the OPEC+ output target and the EU ban on Russian crude imports as well as the G7 price cap which is aimed at reducing Russia’s ability to finance the war in Ukraine. This is as it affects the supply side. On the demand side, the International Energy Agency (IEA) has increased its global oil demand growth estimate for 2023 on ‘rising crude consumption in India, China and the Middle East’.
Similarly, crude oil output is also likely to shore up to the 1.69 mbpd budget benchmark following a reduction in oil theft and the implementation of the Petroleum Industry Act. The combined effect of these is that the oil sector performance is likely to gain traction in 2023, much of this in H2 2023, which should rub off positively on oil companies listed on the Nigerian Exchange.
All said the combination of significant downside in H1 and limited upside in H2 will most likely shape stock market performance in 2023. While the Bears may dominate the Bulls in H1 2023, the equities market will likely rebound sometime in H2 once global economic conditions and investors’ risk appetite improve. Overall, the investment environment in 2023 will most likely be VUCA-oriented. In a VUCA (Volatile, Uncertain, Complex and Ambiguous) environment, an investor’s best bet is to stay with my time-honoured investing advice- adopt the DHL approach. This entails Diversification of investments by ensuring that asset classes in a portfolio are negatively correlated; Hedging against inflation and exchange rate risks including through a consideration of derivative products and dollar-based assets as well as adopting a Long-term horizon concerning stocks with sound fundamentals to be able to reap the full benefits of investments in the stock market.