The Nigerian Stock Exchange, NSE, has been named the world’s best performing stock market since the beginning of 2018, following healthy rally recorded on the bourse.
The stock market has recorded 12 percent growth two weeks into the new year. In 2017, the local bourse was the third best performer in the world, growing by over 40 percent year-on-year.
According to a report by Bloomberg on Monday, January 15, 2018, the rising price of crude oil in the global market has buoyed this and the Nigerian equity market could rise further if the price of oil continues to increase.
“For investors wanting more exposure to consumers in Africa and Nigeria, in particular, the outlook is good,” said Paul Clark, a money manager in Johannesburg at Ashburton Investments, which owns Nigerian stocks including Seplat Petroleum Development Co. “The banking sector is probably the most attractive at the moment, especially the tier-2 lenders.”
According to Bloomberg, Foreign investors have been crucial in driving the market higher. The New York-based Global X MSCI Nigeria ETF attracted record weekly net inflows last week. That helped to increase the exchange-traded fund’s market capitalization to almost $90 million, double the level in May last year.
Even after the gains, Nigerian valuations are the least expensive among the major African equity indexes. Nigerian stocks trade at a forward price-to-earnings ratio of 10.1, while South Africa’s are at 14 and the MSCI Emerging Market Index is at 13.
That suggests there’s further upside, according to Cape Town-based fund Allan Gray. While foreign investors turned negative on Nigeria after following the 2014 oil crash and subsequent recession, the economy picked up last year and growth is forecast by the International Monetary Fund to accelerate to 2.1 percent in 2019.
“For long-term investors, Nigerian equities were a screaming bargain,” said Nick Ndiritu, co-manager of Allan Gray’s $389 million Africa equity fund, which doesn’t include South Africa. “Investor sentiment has turned more bullish on Nigeria and a re-rating of the Nigerian stock market is now under way.”
Still, there are some warning signs. The 120-day correlation between Nigerian stocks and Brent crude is now around the highest in two years. If oil prices reverse their 45 percent climb since June, Nigerian assets could take a hit.
That’s one reason HSBC Holdings Plc has a negative outlook on the stocks. The U.K. bank also says Nigeria will have to free its currency further. While the central bank eased some capital controls last year and opened a trading window for foreign portfolio investors, it continues to operate several exchange rates.
“Nigeria’s multiple exchange rate system is likely to remain a key drag, keeping long-term investors on the side lines,” HSBC analysts David Faulkner, John Lomax and Kishore Muktinutalapati said in a note on Jan. 11.