Did you know that the Nigerian Stock Exchange (NSE) was the 3rd best-performing exchange in the world? Improved crude oil prices and a resolution to the country's foreign exchange crisis lifted the market to a whopping 42% gain in 2017.
Here are four charts that take a more in-depth look at the NSE.
1. What would ₦10,000 invested in Apr 2016 would look like today?
The NSE was a top market to invest in
Investing in the Nigerian Stock Exchange (NSE) index two years ago would have almost doubled your money today. While the economic and foreign exchange recovery has been a significant driver of this, credit must also be given to the NSE leadership as they made strides to make the exchange a destination for global investors. Amongst the milestones in 2017 was the renewal of a partnership with the London Stock Exchange, which further opens Nigerian companies to foreign capital as they can list in London and Lagos at the same time.
2017 also saw the NSE introduce its ₦500 million state of the art data centre, which will create more automation, digitalisation and transparency. Such investment in technology could see the highly anticipated $2.3bn MTN IPO take place in the full digital form.
What is not captured in this graph is the riskiness of investing in Nigeria. Amongst the indexes shown, MSCI Nigeria ranked 2nd in terms of price volatility over the two year period, making the NSE a tough place to invest for the faint-hearted.
2. Domestic investor recovery
Domestic investors are creeping back.
Nigeria’s stock exchange used to be dominated by locals; until the 2008 global financial crisis decimated Nigeria’s banking sector and wiped over 45% off the NSE. Since then, foreign investors have grown to prominence while Nigerian investors still nurse wounds from a decade-old crisis. While foreign investment is encouraged in Nigeria, the majority of foreign investments in the NSE is portfolio investment – this type of money can leave as quickly as it enters. This makes the NSE vulnerable to external shocks that compel foreign investors to flee with their capital, leaving locals to nurse even bigger wounds.
Having a higher domestic share would better insulate the NSE from capital flight. Efforts to boost pension fund participation in the equity market are a crucial – though stalling – first step, but financial literacy and high interest rates on risk-free government bonds makes the volatile equity market a hard sell for Nigerian investors.
3. Banks dominate the NSE
Nigerian banks are strong on both measures
You won't be able to tell that Nigeria was an oil-dependent country by looking at the NSE. Most oil majors are not listed on the NSE, so when it comes to the stock market, oil is a bench player. Here, banks rule the roost, and while they only make up 26% of the market value, they account for around 75% of daily traded volume. When banks move, the whole market moves.
Fortunately for the NSE, banks have been moving in the right direction over the last two years, with many reporting strong profits in 2017. A high-interest rate, reduction in bad loans, and the economic recovery have all lifted the sector.
But when we consider that the banking sector only employs at most 1% of workers, how much of these profits will trickle down to the everyday Nigerian?
4. Which sectors get the capital? And how important are they?
Agriculture isn't getting the capital it deserves.
A strong stock market typically signals a healthy economy. While Nigeria's stock market is showing robust growth, it is a pale reflection of the state of Nigeria's economy. Nigeria's growth is powered by agriculture and SME growth, but the chart above suggests that capital does not flow to these areas. This is particularly worrying when you consider that agriculture employs almost half of our workers.
In the case of SMEs, the NSE has The Alternative Securities Market (ASeM) – a platform for small and mid-sized fast-growth companies to raise critical cheaper long-term capital. But the platform has been scarcely used as only ten companies listed in 2013, and just nine companies list today, none of which are in Technology or Agriculture.
On the one hand, we should be proud that the NSE's is being recognised globally for its growth. But on the other hand, when you consider the nature of the companies and investors that rule the exchange, it is hard to connect the dots between the NSE and Nigeria's economy.