Friday, February 19, 2021 / 09:45AM / Bukunmi Adejobi,
Proshare Research / Header Image
The Nigerian Stock Exchange's (NSE's) recently launched growth board (GB) has stuttered over the first two months of 2021 as equities listed in the market segment are yet to inspire strong investor interest. The cooling of sentiments of investors to the GB reflect a jump on the sell-actions of large institutional investors who have favoured profit-taking in the first quarter of 2021, the large investor sell-off rode on the back of a gradual rise in yields of fixed income investments that had tumbled in the early weeks of the year.
With coupon rates up and inflation-adjusted yields on newly-issued bonds and bills still marginally negative the GB outlook for equities remains cloudy. The problem with growth board stocks is that the COVID-19 pandemic disrupted sales and earnings leaving investors wary of buying the stocks without an idea of potential future earnings and dividends. The early optimism concerning the board has given way to a more restrained outlook.
Equity analysts note that the launch of the board was part of the NSE's strategies to encourage investors to take notice of companies with high growth potential as was reported by Proshare in a previous article "Growth Board To Roar As NSE's ASeM Slowly Disappears". According to executives of the stock exchange, the growth board was designed to encourage the listing of companies, which were active in their respective sectors and that had shown strong upside earnings potential with good corporate governance standard. The growth board is characterized by less stringent listing requirements, enabling easier access of these companies to listing on the NSE.
On 30th November 2020, the NSE announced the movement of four companies from the alternative securities market (ASeM) to the growth board. The companies were:
1. Chellarams Plc
2. Living Trust Mortgage Plc
3. McNichols Plc
4. The Initiates Plc
Breaking Bad Week-on-Week (W-o-W)
The NSEASI had a good start in 2021 with +3.79% (W-o-W) as a trickle-down effect of the rally in December 2020 as local investors dictated the tone of the market due to high liquidity and saw the equities market as a better choice for higher returns on investment compared to the fixed income market which in return lifted market capitalization to N21.06trn while year to date return stood at +50.03% at the end of year 2020. Week-on-Week yields on the bourse in January 2021 exhibited a zig-zag pattern with declines recorded in Week 1(-0.37%) and Week 3(-0.42%) however, the index closed the month positive with +3.44%.
On the other hand, in February bearish sentiments began to dominate the market as concerns about the uptick in yields in the fixed income market such as the rise in OMO rates by the CBN including the outcome of the recent Nigerian Treasury Bills Auction resulted in the sell-down of investors' portfolio. In Week 1, the NSEASI recorded -1.66% decline W-o-W, the bearish trend continued into Week 2 to close the week with -3.04%. (see chart 1)
Chart 1: NSEASI Vs Growth Board Index Yields 31 Dec. 2020-12 Feb. 2021
Source: NSE, Proshare Research
The GBI: Stirred but Not Shaken
The Growth Board Index (GBI) was officially added to the NSE' sector indices on December 2, 2020, it started with 1,000 basis points and has since been active. From the graph (see chart 1), it is evident that the Growth Index has lower activity levels compared to the NSEASI in terms of index movement.
The Index started the year flat in the first week of January 2021 as it was characterized by a lack of movement in Yields while in second week the narrative changed. The index dropped by -3.32%. It is noteworthy that Chellarams Plc released its Q2 2020 Unaudited results for the period ended September 30th, 2020 on January 13, 2021 and declared a loss after tax of N615m while revenue declined by -63.2%. This was a likely driver of the fall in market value as investors experienced large equity sell-offs as they took profit.
On Friday, February 5 2021, the NSE admitted Briclinks Africa Plc, to its Growth Board. As a result of the newly admitted stock, the Index closed the week positive with a growth of +3.26% W-o-W. At the end second week of February (the cut-off date of current review), the index closed with a growth of +0.42%, representing a reduction from the previous week's yield.
Analysts have observed that stocks that crossed over from the ASeM to the GB showed lower traded volumes and values. Equity traders note that the NSE has a large ground to cover in terms of attracting unlisted companies with high growth potential. For example, with increased innovation within the financial services sector, companies in the Fintech industry with high growth potential could seize the opportunity to raise long-term capital and provide liquidity for their shares through the NSE.