In a remarkable turn of events, Nigerian equities are emerging as the top-performing assets in the Europe, Middle East, and Africa (EMEA) region for the year 2024. The surge is attributed to the inflow of investments from pension funds and institutional investors who anticipate record profits from lenders benefiting from revaluation gains on foreign-exchange positions.
The NGX All-Share Index, consisting of 151 members, has recorded an impressive 11% gain in local currency this year, ranking second globally, trailing only Argentina. Over the past year, the NGX has surged by almost 60%, overshadowing the less than 2% advance of the MSCI Emerging Markets EMEA Index during the same period.
The driving force behind this surge is the remarkable performance of banking stocks, with the banking index witnessing a 16% increase in 2024 and an astounding nearly 140% rise over the past 12 months. Key players such as the holding company of Access Bank PLC, Zenith Bank PLC, and Guaranty Trust Holding Co. have seen substantial gains, contributing to the banking index’s impressive performance. The banking index is currently trading at a price-to-estimated earnings ratio of 2.24 times.
Ayodele Salami, Chief Investment Officer for UK-based Emerging Markets Investment Management Ltd., pointed out that significant profits resulting from the devaluation of the naira are making Nigerian banks particularly attractive for investors. Despite the Central Bank of Nigeria’s (CBN) directive against using these gains for dividends, there is anticipation that some gains may eventually be passed to shareholders, possibly through bonus issues.
Zenith Bank, Nigeria’s largest lender, exemplifies this trend, having booked 355.6 billion naira ($372 million) of foreign-exchange gains, doubling profits in the nine months leading to September. Other banks, such as UBA Plc, have similarly experienced substantial profit increases.
Additionally, negative real yields on the nation’s fixed-income securities have contributed to the increased attractiveness of equities. The Central Bank of Nigeria recently sold one-year treasury bills at a yield of 8.4%, significantly lower than the inflation rate of 28.2% in November, which marks an 18-year high.
Local institutional investors, including pension funds, are redirecting their investments toward equities to boost income, given the positive returns relative to inflation. Usoro Essien, Head of Research at RMB Nigeria Stockbrokers, noted that a lack of alternative investment options is prompting a shift in interest toward equities, and pension funds are adopting longer-term views on equity investment.
As Nigerian lenders prepare to release their 2023 financial reports and dividend plans in the coming month, the positive momentum in the equity market is expected to continue, further solidifying Nigeria’s position as an attractive destination for investors in 2024.
