Searching For A Nexus Between Corporate Performance And The Economy - Is it Deja Vu All Over Again?


 Saturday 19th August 2017 12.10PM/ Proshare Research   


The apex bank stuck a cautionary line in its last monetary policy committee meeting on the equity market. The lords of the apex tower stated that the equity market might be experiencing a seeming bubble. The thumb rule at this point of the cycle is that, monetary anchor (interest rate) will be more of a burden to equity rather than a growth lever.   

The ripple effect is a monetary anchor favouring fixed instruments ahead of equities, allowing asset rotation to occur? Moreover, high interest rate plays out as a negative beta for firms, a needless weight at this point.  We must also be clear that the thumb rule in certain circumstance fall short of expected asset rotation, whereby a tweaking in interest rate could fail to trigger an asset rotation.  As interest rate fail to prevail, the existing status quo is maintained and actively in play. 

Arguably, in such scenario strong macro fundamentals still out weights a hike in interest rate. The market is largely reassured by both strong bottom line of corporates and a growing pool of consumers willing to spend. Even though monetary authorities are concerned about weaker real variables, the presence of strong fundamentals retains the status quo.  

Equity capitalization in Nigeria hits N13trillion, the highest since October 2014. Obviously, market capitalization has caved strongly outwards compared to N9.27 trillion in December 2016 and N8.97trillion in January 2017 respectively.           

Fig 1:  The market capitalization of the Nigeria stock exchange  



Source: CBN, NSE, Proshare Research

Reflective of a 40.7% and 51.19% in market appreciation compared to December 2016 and January 2017. Suggesting that market bolstering has occurred within a short horizon.  At the same time one must not discount the reality of a fragile economy buckled down with a sharp monetary anchor. Evidently, the double whammy of an amplified leverage risk and a depressed consumer stare us at the face.    

Fig 2: Firms Leverage Position As At 2016  


S0urce: IMF, Proshare Research  

Therefore, identifying the factors responsible for the on-going bullish run on equities has become inevitable and weather it is a deja vu season all over again?    

All Share Index  

Fig3: The All Share Index from 2010 Till Date  



Source: CBN, NSE, Proshare Research 

As at 16th August 2017, the NSE All-Share Index (ASI) stood at 36,102 basis points reflective of 29% uplift compared to the end of the first quarter of 2017 and 35.8% return on a year to date (YTD) run.  The head of the curve has not emerged but a large chunk of the collars are already in place, technical wisdom will suggest that the bullish momentum witnessed in the equity space will continue for some time.   

Certainly, leading indicators such as the Purchasing Managers’ Index  (PMI) and the Naira have strengthened showing signs of improvement, but the momentums so far remain fragile to ignite such outward cave (fig 4).  

Note: Market Yield as at Thursday 17th August 2017 

Data from our universe of selected exchange bourses, which track specific markets, shows that Nigeria fall within the top 3 performers. In specifics, the Australia’s ATX and Argentina’s Merval are the only markets that have outperformed the Nigerian ASI so far.  

Interestingly, Nigeria is the only country experiencing a negative growth in our bucket of selected countries. The equity market is experiencing an astonishing bullish run on the back of a fragile economy.  Bolstering the position that there is not enough macro fundamental to provide the kind of undergird for such an uplift.  

It is not surprising that many are of the opinion, that at some point in time. The Nigeria ASI will either have to temper down on its yield curve or crawl back to ensure a correction, in order to avoid experiencing  an over heat.  How true is that?


Almost all the sub- indexes are within   positive territory except the NSE ASeM Index. Sub sectors like insurance and oil are actually standing on marginal footing when compared to their earlier yield position. The stream of   inflow into the banking and food sector has resulted into 40.22% and 40.05% YTD, holistically elevating the index as a whole.     

Fig 5:  Growth across selected sectors from Q3 2016 t0 Q1 2017  


Source: NBS, Proshare Research  

The financial sector grew at 0.67% at the end of the first quarter, reflective of a slower pace compared to previous quarter. The food and agriculture sector grew at 4.07% and 3.39% at the end of the first quarter. Regardless, the growth in such sectors remains paltry compared to the price appreciation been witnessed. The health of explanatory variables such as Industrial production, cost of treasury bills and the yield curve of government instrument in our macro proxy still makes equity a cautious bet (fig 6).  

Flow of Funds



As at May 2017 the total number of deals done in the capital market stood at 269, 624, which is a 31% decline when compared to first the five months of 2016.  The total number of deals clinched so far till May 2017 make up 30% of the total deals in 2016 (fig 7).   

Fig 8; Foreign Inflow and Total Domestic Participation from July 2015 to June 2016  



Source: NSE, Proshare Research

The foreign inflow into the equity market stood at N65.15billion, implying a 9.8% decline in inflow, when compared to the previous month of May  where foreign inflow to the equity market stood at N73.15billion.  Regardless, the inflow in the month of May remained the second highest amount foreign inflow over the last 27 months.  

Data available showed that the month of May alone witnessed 9.73billion shares traded which is valued at N102billion in contrast to 4.21 billion shares traded in April, which was valued at N27.4billion. Suggesting improved market participation.  

Renewed foreign participation in the equity market has elevated the ASI, therefore it not surprising to see price appreciation in the market. The introduction of the Nigerian Investors and Exporters window by the apex bank has provided a medium of entry for foreign investors, coupled with largely reduce risk of a Dollar trap compared to the previous horizon. 

Evidently, foreign investors are in a better position to hedge against currency risk compared to a year ago.  Apparently, the dynamic have not only provided a strong positive net foreign flow in the equity market, at the same time triggered price appreciation. The reaction has led to increased participation by domestic investors in the equity market, especially retail by 47% in the month of June alone (fig8).  


Cyclical risk such as earlier wild swings experienced in  the foreign exchange   market  seem to  be  gradually fizzling  off  more else firms have begun to be in ward looking, so as to reduce  demand for foreign exchange. In return firm’s cash flow have also been less volatile and more stable compared to 2016. Improved government heterogeneous sources of inflow accompanied with increased activity by the apex bank in the foreign exchange market have calmed a nervy Naira.  

Corporates have re-adjusted better to the cycle by reducing their individual micro risk levels. They have become more efficient in managing systemic risk compared to a year ago, whereby they have either adjusted price or quantity to meet today’s reality. One is tempted to say they are in a better stead.  

We are also aware that the equity market is vulnerable to wolf packs intrusion and at times fund flow do camouflages the macro flaws. Certainly, in the weeks ahead, the direction of the curve will provide more clarity.   

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