Nigeria’s main share index shot to a 13-year high last month, hitting a level not seen since the 2008-09 global financial crisis wiped out 60 per cent of the market’s value.
Yet investors are in no mood to celebrate, with some arguing that the stock market has become increasingly moribund of late, struggling to attract new companies or keep pace with inflation.
The authorities have plans to breathe new life into the Nigerian Exchange by wooing fast-growing “unicorns” from Nigeria’s flourishing tech scene. But this will come to nothing unless they can lure back the foreign investors who fled the market in recent years, according to fund managers and analysts.
“With oil prices recovering, it should be a good environment for Nigerian equities,” says Charlie Robertson, head of macro strategy at investment bank Renaissance Capital. “But it’s hard to have a dynamic local equity market when there aren’t professional foreign investors coming in.”
Nigeria’s stock market thrived during the early part of the coronavirus pandemic. It is up more than 70 per cent on its level at the end of 2019, reversing a slump that began with the 2014 oil price crash. Still, gains have slowed considerably since 2020, when a move by the central bank to shut local investors out of the market for high-yielding government debt initially pushed many buyers into equities.
And the growth outlook for the economy remains relatively modest despite a recovery in the oil price to above $90 a barrel, points out Hasnain Malik, head of equity research at emerging markets research provider Tellimer.
“It’s simply not growing that fast,” Malik says. “When you look at the composition of what’s listed and what’s traded, it’s a market that’s dominated by banks and consumer companies, none of which are growing out of kilter with the economy as a whole.” He forecasts a real growth rate of 2.7 per cent this year.
Nigeria’s all-share index contains a few large companies, such as Dangote Cement — which triggered the January rally by announcing plans to buy back 10 per cent of its shares. But Dangote and MTN Nigeria, a big mobile telecoms company that listed in 2019, are still majority owned by their parent companies, meaning the shares are not nearly as heavily traded as their size would suggest, Malik notes.
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Attracting new companies to rival these incumbents has proved to be a struggle. When Skyway Aviation Handling Company came to the public market, in 2018, it ended a four-year drought for stock market listings. But despite more new arrivals since then, the number of companies on the Nigerian Exchange has dwindled from 168 at the start of 2019 to 156 today.
“Listings have been few and far between,” admits Temi Popoola, Nigerian Exchange’s chief executive. So he is drawing up plans to lure a new generation of companies from the country’s tech scene on to public markets. A number of these companies have already attracted considerable investment from private equity and venture capital firms. Start-ups raised $1.5bn in total in 2021 — more than 10 times the amount four years earlier — according to Renaissance Capital. Firms such as Flutterwave and Opay have attracted billion-dollar valuations, giving them so-called “unicorn” status.
Popoola says he plans to set up a “Nasdaq-style tech board” to woo such businesses. Rules that require companies to have been profitable for three years would be relaxed for this segment of the exchange, he says. “There is news of a capital raise or a seed round almost every week in Nigeria,” Popoola says. “We need to capture some of that capital formation on the exchange.”
He plans to court younger stock market investors, too — the current average age is 52 — by streamlining the process of buying and selling shares to make it more accessible to smartphone users. MTN’s share sale to retail investors last year, sponsored by the exchange, was “the first end-to-end digital transaction in the history of Nigerian capital markets”, Popoola says.
Bringing foreign investors back to Nigeria’s equity market could prove a bigger challenge, however. As oil prices crashed at the start of the pandemic, the central bank imposed foreign exchange restrictions to ease a shortage of dollars in Nigeria’s crude-dependent economy and prop up the value of the naira. This echoed similar measures taken after a previous oil rout in 2015.
But that made it very difficult for foreign investors in Nigerian stocks to get their money out of the country after selling any holdings. The result has been a plunge in overseas participation in the market. According to data published by the Nigerian Exchange, foreigners accounted for just 23 per cent of Nigerian equity trading last year — down from more than 50 per cent in 2015.
And there is little new foreign money coming into the market, analysts say. “They still trade it, but these are the foreigners that are trapped in Nigeria,” says Malik. “It’s been moribund since 2019.”
Fund managers argue that a relaxation of currency controls is needed before many will return. But potential buyers are likely to remain wary of what could happen in the next downturn for oil markets.
“When you impose capital controls twice over the course of five years, that’s going to burn a lot of bridges,” says Kevin Daly, a portfolio manager at Aberdeen Standard Investments.
“Nigeria has promised so much, but disappointed way too many times for equity investors.”