Foreign investors boost liquidity in one of world's best-performing emerging markets
Nigeria's stock market is up more than 20 percent this year on stronger-than-expected corporate earnings and renewed foreign investment.
The west African nation once again has one of the world's best-performing emerging markets as foreign investors are boosting liquidity and keeping the value of the Naira steady.
With comparable emerging-market economies showing just a six percent gain so far this year, Nigeria's stock market has rallied more than 20 percent since January, with average daily volumes up 76 percent against a year ago on trading of about $20 million dollars.
The return of investor confidence following last year's huge bailout of failing banks has focused mainly on blue-chip savings institutions and manufacturers of consumer goods, including United Bank for Africa, Zenith Bank, Nigeria Breweries and Flour Mills Nigeria.
Kayode Akindele is a director for the Lagos-based financial advisor Greengate Strategic Partners.
"We've seen some international portfolios from abroad coming back from the market. Managers see value in the market at the moment and they are taking positions either in the banking sector or food and beverage sector, especially because of the early results of these companies have been pretty good considering the economic slow down. I think the second thing we are seeing is that the money markets rates have collapsed really in Nigeria," Akindele said.
Thirty-day money market rates are down from 18 percent in December of 2009 to just two percent today. That is driving investors back into stocks.
Nigeria's banking sector accounts for nearly two-thirds of the stock market, so analysts are watching closely as Abuja moves toward recapitalizing rescued banks. Banking sector reforms may also include limiting capital market lending to a proportion of the bank's balance sheet and prohibiting banks from using depositors' funds for proprietary trading or venture capital investments.
Akindele says the key to keeping Nigeria's stock market rally going is keeping these reforms on track.
"Whatever happens in the baking sector will really drive the rest of the market. So, I think in reality, it is really what happens to the banking reforms. Can the rescued banks be recapitalized? Can they get back on the path of growth? I mean the Quarter 1 results from three banks released which are First Bank, GTB and Zenith are showing that earnings are back, that profitability seems to be back up and the market is improving for at least those institutions," Akindele said.
This stock market rally is all the more remarkable when you consider the political uncertainty about elections next year, renewed violence in the city of Jos and the health of President Umaru Yar'Adua. Investors say the sustained performance of Nigerian stocks is testimony to the leadership demonstrated so far by Acting President Goodluck Jonathan, who has named a former managing director for Goldman Sachs as Nigeria's new finance minister.