Nigeria’s stock market (NGX) is having an enticing run. Last year, it was one of the world’s best performers, gaining 45.9%. But this year seems even hotter. We’re just over two months into a new year, and it’s already up over 30%. No other stock market in Africa recorded this kind of rally. At the end of February, the NGX’s All-Share Index had gained 33.71% since the year started.

You’d expect this to mean that Nigeria’s economy and productivity are booming. But that’s not the case. The stock market is simply defying every macroeconomic factor that ought to pull it down. In the last year, the naira had its worst run since it regained democracy. It hit an all-time low of N1534/$ at the official markets and N1910/$ at the parallel markets. Many companies have been burnt to the bones by this single flame.

According to the Manufacturers Association of Nigeria, about 767 manufacturing companies shut down operations, while 335 experienced distress in 2023. It also said that companies had N350 billion worth of unsold goods last year, and capacity utilisation declined to 56%. Multinational companies like Unilever, GSK, P&G and others have taken their operations out of Nigeria in the last year. It’s arguably the quickest succession of exits by multinationals in decades. Why? High production costs, forex scarcity and low demand. The official inflation rate is 29.9%, and interest rates recently reached 22.75%.

Honourable Patrick Umoh, a House of Representatives member, said: “Multinational companies are exiting or closing operations in Nigeria due to economic uncertainties, challenging business environments, lack of electricity, constant naira devaluation, high taxes, insecurity, poor infrastructure, port congestion, and stringent government policies.”

Manufacturers are not alone. MTN Nigeria, the country’s largest telco, reported its first loss after tax (N137 billion) since it got listed on the Nigerian stock exchange. Karl Toriola, chief executive officer of MTN Nigeria, said, “The significant devaluation of the naira in 2023 resulted in a materially higher net forex loss of N740.4 billion (2022 restated: N81.8 billion), reflected within net finance costs, which resulted in a reported loss after tax of N137.0 billion compared to a restated PAT of N348.7 billion in 2022.”

Even more crucial is the decline in foreign capital inflow. Nigeria’s foreign investment inflows fell by 26.7% to $3.9 billion in 2023 from $5.3 billion in 2022. The banking sector had it worse: inflows dropped by 60% to $832.64m.

So, if the outlook is this gloomy, why is the stock market so bullish? One possible explanation is that Nigeria’s stock market is relatively small for its economic size. Its current valuation is about 15% of Nigeria’s GDP —deeply undervalued. And most of that valuation —about 70%— comes from a handful of large-cap companies. This sends an impression to investors that they’re still very early.

More so, investors have been making bets on policy changes that could make large businesses more profitable. For instance, energy stocks rallied last year after news that NNPC would no longer be the sole importer of fuel. Bank stocks also surged when investors realised that the naira devaluation would prop up the value of assets denominated in dollars. The Big 5 lenders (FBN Holdings, UBA, GTCO, Access Holdings and Zenith) alone earned N2.3 trillion from forex translation gains at the half-year, UBA taking approximately a third of the booty.

Another factor was that pension funds and other institutional investors shifted from fixed-income assets into stocks. Inflation was outpacing yields on bonds, and fund managers ran to the stock market to boost performance. In the first nine months of 2023, pension funds invested N1.4 trillion — 53% more— in the stock market, according to the National Pension Commission.

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