The Nigerian Stock Market: Time to Invest
In an earlier blog, I explained the reason behind my belief that yields are going to drop in the fixed income markets across the yield curve. This is largely due to inflation that is trending down and likely to continue that way. The fact that the Federal Government has already made provision of N971 billion in the 2013 national budget for fuel subsidy means that even if there is a rise in price, it is not likely to be substantial enough to send inflation into a tailspin.
With inflation taken care of and the stability in Naira, the CBN will have no choice but to be forced to cut rate in the first quarter of 2013. Lowered rates are expected to boost economic activity as banks are forced to lend. Couple that with inflow of funds that is expected, due to the upgrade of Nigeria by S&P and the addition of Nigeria FGN bonds into JP Morgan and Barclay's Indexes and there is enough fuel for the stock market to run on.
The attraction of international investors to the Nigerian economy is proven by the drop in the yields of the Nigeria Eurobond, The bond was issued at a yield of 6.75% in 2011 but it currently yields 4.24%. The cost of borrowing by the FG has dropped significantly in the international market. The picture below shows the price momentum of the bond issue.
Now, I will provide evidence as to why the stock market has become significantly attractive.
With inflation in the US standing at 2.20% at the end of October, the Eurobond provides a real return of 2.04%. Inflation in Nigeria stands at 11.70%, which means that the real return provided by the ten year bond stands at only 0.51% since the bond is yielding only 12.21%. This is proof that the momentum is almost over in the bond market since there will be very little attraction if the yields drop below inflation rate.
The ten year bond which was issued in January 2012 traded within a range of N98.76 and N123.92 since inception, with a weekly standard deviation of 2.41%. The bond has also gained 22.11% inception to date
Treasury bill yields traded within a range of 12.79% (the current yield), which is the lowest over the past one year, and 20.76% with a weekly standard deviation of 2.17%.
The NSE Index traded within a range of 19,732.34 and 26,249.95 over the past one year with a weekly standard deviation of 1.83%. This standard deviation is less than that of FGN bond, which is 2.41% and money market investment, which is 2.07%. This is unusual, as equities are expected to be more risky than bonds and money market investment. This is a strong case and this kind of opportunity may not present itself again in a very long time.
It is on the back of this that I believe that this is a very good time to invest in equities. We do not have any kind of volatility index in Nigeria but the little volatility shown by the stock market simply shows that the risk in investing in this asset class has been dramatically reduced. It is far more safer to invest in equities at this time.
The qualitative analysis has shown that the time is ripe and I have also been able to prove it quantitatively, I hope.