By Chukwuma Umeorah
The Nigerian Exchange Limited (NGX) has been a focal point in Africa’s financial markets, starting 2024 on a remarkable note and continuing its strong performance from 2023. By the end of January 2024, it had recorded a 26.43 per cent year-to-date return (YtD) positioning it as the top-performing stock market globally at that time.
The local bourse also emerged as the continent’s best-performing stock market by the first half of the year. As of August 9, 2024, the NGX’s YTD return stood at approximately 31.85 per cent, with the All-Share Index (ASI) reaching 98,92.12 points, an outstanding achievement given the challenging economic environment marked by double-digit inflation, high interest rates, and global economic uncertainty. The growth was largely attributed to increased investor confidence, strategic government policies by the Tinubu administration, and strong corporate earnings from blue-chip companies. However, the significant devaluation of the naira casts a shadow over these gains, raising questions about the sustainability of NGX’s lead in real value terms, particularly when measured against other African markets in dollar terms.
In June 2023, when the Central Bank of Nigeria implemented the exchange rate unification, the value of the naira dropped from N462/$ to around N620/$. By the end of the year, it exchanged for N896/$ in the official window. Since then, the value has been on a downward slope with the naira exchanging for N1,589/$ as at Friday 9, August 2024. This sharp devaluation of over 245 per cent in the nation’s currency within that period meant that while the ASI increased in naira terms, the gains were significantly diluted when assessed in dollars.
Between January 1 till date, market capitalisation has grown significantly in naira terms from N40.9 trillion to N55.9 trillion. However, the equivalent in dollars declined from $45.6 billion to around $35.3 billion highlighting the impact of currency devaluation on market gains.
Comparative performance of other African markets
When compared to other top African stock markets, the NGX’s dollar-adjusted performance reveals a more nuanced picture. For instance, the Johannesburg Stock Exchange (JSE) in South Africa, the most liquid on the continent, with a more reliable exchange rate, reported a relatively stable performance, with a year-to-date growth of about 5 per cent adding around $986.09 billion. Meanwhile, NGX added N15.09 trillion ($9.67 billion) within the same period. Although the NGX outperformed the JSE with a YTD return of 31.85 per cent, investors would naturally tilt toward a market with less volatility.
Available data shows that in terms of return, The Ghana Stock Exchange (GSE) currently holds the top spot with YTD return 41.87 per cent with its composite index closing at 4,440.78 and a market capitalisation of about $5.9 billion from $4.19 billion at the start of the year. Zambia’s Lusaka Securities Exchange (LuSE) follows with a YTD return of 32.79 per cent and a market cap of $4.52 billion from $3.40 it started the year.
The NGX comes third with the Malawian and Ugandan Exchanges following suit, although the other top performing Exchanges are much smaller markets in terms of listed companies, investors participation, volume of trade and liquidity when compared to the NGX and the JSE.
Impact of naira devaluation and monetary policies
The devaluation of the naira has been a double-edged sword for the Nigerian economy and its stock market. On one hand, it was seen as a necessary step to align the official exchange rate with the parallel market, thereby attracting foreign investment by eliminating the multiple exchange rate system that had deterred investors. On the other hand, the devaluation has led to significant foreign exchange losses for companies operating in Nigeria, notably manufacturing and the telecommunications sectors.
For instance, the Manufacturers Association of Nigeria (MAN) reported that “Manufacturing companies lost at least N1.5 trillion in six months (between September 2023 and April 2024) to forex-related transactions.
Telecommunication companies such as Airtel Africa and MTN Nigeria have also recorded huge losses running into millions of dollars due to foreign exchange related crises. Meanwhile, banks seemed to be the only sector that declared profits from FX revaluation.
Policy measures and their implications
The CBN has implemented several measures to stabilise the naira and curb inflation, which exceeded 34 per cent in the first half of 2024. These measures include its hawkish stance on Monetary Policy Rate (MPR), currently at 26.75 per cent (as at July 2024), interventions in the foreign exchange market, and efforts to unify the exchange rate. However, these actions have had mixed results.
The hike in interest rates has attracted some foreign portfolio investment, but it has also led to a shift towards the fixed-income market, reducing liquidity in the equities market. The unification of exchange rates, while reducing confusion for investors, has also exposed the real extent of naira’s depreciation, deterring long-term investments that are crucial for sustainable economic growth
Although the measures by the CBN have been hailed by some professional bodies including PwC, it said, “These interventions may become subdued in the absence of improved capital flows and export proceeds to the foreign reserves.”
Impact of naira devaluation on foreign participation on NGX
Data from the NGX summary of transactions as of June 30, 2024, reveals that despite the challenges posed by the significant naira devaluation, the market experienced both notable inflows and outflows of foreign capital.
On one hand, it is true that there was a substantial outflow of foreign portfolio investments, with foreign outflows reaching N311.41 billion in the first half of 2024, compared to just N73.06 billion in the same period in 2023. This suggests a significant increase in capital exiting the market, likely due to concerns over the currency’s stability and overall economic conditions.
However, the positives cannot be ignored. Foreign inflows also saw a remarkable increase, with N229.07 billion recorded in H1 2024, up from N72.02 billion in H1 2023. This indicates that despite the naira’s depreciation, there was still substantial interest from foreign investors, particularly in the early months of 2024. In fact, in June 2024 alone, foreign inflows stood at N38.25 billion, while outflows were slightly higher at N43.94 billion.
Future outlook
The future of the market however remains bright as analysts have suggested that the potential landmark listings of significant entities like the Dangote Petroleum Refinery, the NGX is poised to deepen its capital market and broaden participation. These listings are expected to attract substantial domestic and international interest, providing a boost to market liquidity and potentially offsetting the negative impacts of currency devaluation.
Moreover the management of the NGX have also made several efforts in deepening the market and making it more attractive to both domestic and foreign investors through technological advancements and other innovative solutions.
