Exchanges are platforms where securities, stocks, bonds, and other financial instruments are traded. Naturally, exchange platforms reflect the nature of the country's economy within which they operate. This is because people invest when they have disposable income. As such, when the economy is growing, there is more activity in exchange, and vice versa when in a recession. That said, the Nigerian Exchange (NGX) has been extraordinarily outperforming expectations despite high inflation, removal of energy subsidies and overall slow business growth.  

The Nigerian Exchange (NGX) is Nigeria's leading stock and securities exchange. The NGX's activity performance can be measured through the NGX All Share Index (NGX ASI), which tracks the overall health of all equities listed on the NGX and reflects the health of the Nigerian economy. The NGX ASI has been outperforming expectations since January 2023. 

As shown below, the Nigerian stock exchange starts every new year with a high due to the new year blues before returning to expected levels during the year:

However, 2023 tells a different story. The market has outperformed expectations and has risen since Q2 2023.  That is, despite inflation rising by 7% from 21.82% in January 2023 to 28.92% by December 2023 (according to NBS), rising food costs and a challenging business atmosphere in Nigeria, which has caused the exit of International Oil Companies (IOCs), the NGX ASI has grown from 55956.59 on June 8^th 2023 to a record high of 105,722.78 as at April 2024; a whopping 89% growth in under ten months. A deeper look shows that The Banking Index recorded a growth of 115% by December 2023, second to the Oil and Gas Index, which grew by 126% within the same period. In simple terms, if you had invested one million naira in the Oil and Gas index, you would have a balance of N2.26m and a profit of N1.26m. A growth 3x inflation!

Record profits started the oil and gas segment rally in the downstream sector, especially Eterna, Conoil and MRS. In Q1 2023, Eterna recorded a gross profit of N3.5b, 54% higher than the N2.3b in 2022 driven by the lubricant segment.  Furthermore, pretax and post-tax profits increased by 6% and 8%, respectively, Y-o-Y. In Q3 2023, subsidy removal was a welcome development as investors and companies believed downstream firms could import petroleum products at will and sell at whatever price they believe is viable for their business. This prediction was partly correct. Conoil’s pretax profits grew by 181% from N1.23b in Q3 2022 to N4.27b in Q3 2023.

Furthermore, the currency devaluation in June 2023 led to record profits by commercial banks from FX dealings. By Q3 2023, the FUGAZ, Stanbic, Wema Bank, Sterling Bank Holdings, Fidelity Bank, and Jaiz Bank had cumulatively recorded a profit of N2.2 trillion, a whopping 156.4% increase from Q3 2022, with 64% of their earnings generated from FX-related transactions and assets. This change led to a massive boost in the NGX Banking Index and, subsequently, the NGX ASI as bank shares boosted the NGX rally.

However, when consumer goods companies were examined, Cadbury Nigeria and Nestle Nigeria, for example, recorded heavy losses due to fx-related transactions even though their shares were trading at a premium. For instance, Cadbury Nigeria’s net finance cost was N19.8b, ending Q3 2023 with a pretax loss of N10.2b. Cadbury shares dropped by approximately N3 before rebounding back to N15.6 per share two weeks later despite recording such heavy losses.

With such high negative earnings, one would expect Cadbury and, by extension, the consumer goods index to plummet. Instead, it continues on an upward trajectory. The growth does not tell the true story, as the fundamentals say otherwise. 

The tale of the NGX rally is one of mixed signals. Despite record profits in the banking and O&G sectors, counter sectors such as consumer and industrial sectors suffered heavy losses due to currency devaluation and subsidy removal. The profits recorded are one-time and unsustainable, whereas the adverse effects on the consumer index are long-term as businesses adjust to the new climate. Also, as the CBN governor attempts to stabilise the Naira, raising the Monetary Policy Rate indicates that debt instruments shall become more lucrative to investors as debt markets have less risk than the capital market, thus depleting the number of investors available in the NGX market. Whatever it is, exciting times await the NGX.

References

Cadbury Nigeria Plc “Cadbury Nigeria Plc Un-audited Interim Financial Information for the Nine Months Ended 30 September 2023” Nigerian Exchange Limited Cadbury Nigeria Plc Un-audited Interim Financial Information for the Nine Months Ended 30 September 2023

Conoil Plc “UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 SEPTEMBER 2023” Nigerian Exchange Limited UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 SEPTEMBER 2023

Eterna Plc  “Eterna Plc IFRS Financial Statements for the First Quarter Ended 31st March 2023” Nigerian Exchange Limited Eterna Plc IFRS Financial Statements for the First Quarter Ended 31st March 2023

Nestle Nigeria Plc “Nestle Nigeria Plc Annual Report For the year ended 31 December 2023” Nigerian Exchange Limited Nestle Nigeria Plc Annual Report For the year ended 31 December 2023

Nigerian Exchange Limited “NGX Data Indices”  Indices - Nigerian Exchange Limited