Nigerian Stock Exchange is the best in the world so far in 2018, all thanks to oil

The Nigerian equity market has had the best performance so far in the year.

Since Q3 2017, the Lagos bourse has been growing steadily and this performance had been sustained by increase in investors’ confidence in the Nigerian economy.

The creation of the Investors' and Exporters' FX window by the Central Bank of Nigeria (CBN) and appreciation of some high value stocks in the equity market triggered this renewed interest of  foreign investors.

Appreciation in the value of shares of Dangote Cement Plc  was amajorfactor that was widely noted. This is because the cement maker accounts for one-third of total market capitalisation of the NSE.

“For investors wanting more exposure to consumers in Africa and Nigeria, in particular, the outlook is good. The banking sector is probably the most attractive at the moment, especially the tier-2 lenders,” said Paul Clark, a money manager.

Combining these factors, the stock market hit its highest point since 2008 and broke the psychological level of 14,000 All Share Index in the second week of January 2018. Low cost of investing in the Nigerian equity market, in dollar term, also played an important role.

So many foreign investors now find it more profitable to invest in Nigerian stocks than that of other developing and emerging markets.

“For long-term investors, Nigerian equities were a screaming bargain. Investor sentiment has turned more bullish on Nigeria and a re-rating of the Nigerian stock market is now underway,” said Nick Ndiritu, co-manager of Allan Gray’s $389 million Africa equity fund.

Is this a good sign for stability and health of Nigerian economy?

Analysts and investment bankers have raised concern about the high relationship between Nigerian stock market and global oil price. According to Bloomberg, the 120-day correlation Nigerian stocks and Brent crude price is now around the highest in two years.

A crash in oil price, which cannot be prevented by Nigeria since conditions influencing it are beyond the control of government, would greatly impact the quality of Nigerian assets and economy. It is as a result of this, the HSBC Holdings - a U.K based investment banker, holds a negative outlook on Nigerian stocks.

HSBC also argued that in an investment note issued on January 11 that Nigeria’s central bank needs to adopt a unified and market-determined exchange rate to attract more investments.

“Nigeria’s multiple exchange rate systems is likely to remain a key drag, keeping long-term investors on the sidelines,” HSBC said.

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