NGX Closes Lower In August, Repeats Historical Pattern, Amidst Mixed Sentiment

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The Nigerian stock market experienced notable fluctuations in the month of August, beginning with an all-share index of 97,774.22 basis points, just as market capitalization stood at N55.51tr, just as exchange rate stood at N1,621.12/$ and inflation rate of 34.19%. These figures set the stage for a month marked by volatility and adjustments, reflecting broader economic conditions and sector-specific dynamics. When official business activities closed for the month on Friday, the market had seen a decline of 1.22%, after the composite All-Share index closed the month at 96,579.54 points. There was also a decline of N678.33bn in the value of investors’ worth on the NGX, with market capitalization decreasing to N 55.48tr. Within the period, exchange rate however improved marginally to N1,593.93/$, while inflation rate fell to 33.4%.

These marginal improvements in macro-economic indicators were not enough, as the stock market is currently delivering a negative real rate of return. The year-to-date return began at 30.76% at the start of August, but decreased to 29.16% by the end of the month, largely attributable to the performance of the Industrial Goods sector which posted a negative month-to-date return of 13.06%.

A significant contributor to this decline was Dangote Cement, a leading player in the sector with a market capitalization of N9.07tr, representing 16.35% of the total market capitalization. The performance of Dangote Cement had a considerable impact on the broader market index.

Despite the overall decline, however, several stocks saw impressive gains, particularly Oando Plc, for example, which surged 207.6% opening the month at N25.00 and closing at N76.90 each. It was however behind RT Briscoe which experienced a dramatic rise of 367.10% in its share price, which moved from N0.76 to N3.55 each. Julius Berger also saw significant appreciation, as its stock increased by 75.77%, from N97 to N170.50. These gains highlighted the market’s selective performance, where certain stocks outperformed even in a generally declining market.

On the macroeconomic front, Nigeria’s Gross Domestic Product (GDP) showed a year-on-year growth of 3.19% in real terms for the second quarter of 2024. This growth was primarily driven by the services sector, which grew by 3.79% and contributed 58.76% to the total GDP. The agriculture sector also experienced growth, albeit at a slower rate of 1.41%, down from the 1.50% growth recorded in Q2 2023. This improvement in GDP growth surpasses the 2.51% recorded in the second quarter of 2023 and the 2.98% growth seen in the first quarter of 2024. The increased contribution of the industrial and services sectors to GDP compared to the previous year reflects positive economic trends and robust sector performance.

Inflation data released during the month revealed a decrease for the first time in 19 months, falling to 33.40% in July from 34.19% in June. On a month-to-month basis, inflation stood at 2.28%, a slight decrease from 2.31% in June, partly attributed to the Nigerian government’s decision to suspend Value Added Tax on certain food imports, thereby reducing some inflationary pressures. The marginal decline in inflation suggests that the aggressive interest rate hikes of the past may be nearing their end. Future monetary policy meetings could potentially focus on stabilizing rates, or even making slight reductions if inflationary pressures continue to ease.

However, Nigeria’s foreign exchange (FX) reserves declined by approximately $505.68 million (1.37%) in August 2024, falling from $36.827bn on August 1 to $36.321bn by August 29, 2024. The reserve is set to experience an upturn due to the dollar denominated issue.

NGXASI Monthly Index Chart (Opening)

Examining the market from a broader perspective, it appears to be in an overbought condition, as indicated by a Relative Strength Index (RSI) reading of 74.159. An RSI above 70 typically signals an overbought market, while readings below 40 suggest an oversold condition. This elevated RSI reading suggests that the market might be poised for a correction. While there is currently adequate liquidity in the market, if yields in the fixed income sector continue to decline, investors may start looking more favorably at equities.

Additionally, the Moving Average Convergence Divergence (MACD) indicator is currently above the signal line, which further suggests that the market might be approaching its peak. The market is also trading above the 20-day exponential moving average, a technical indicator used to identify short-term trends. This positioning indicates that the market is in an elevated state and may be due for a correction.

Market corrections are a natural part of the investment cycle and can present opportunities for investors. During such corrections, one effective strategy is sector rotation. This approach involves reallocating investments across various sectors to take advantage of sectors that are undervalued and poised for growth. Sector rotation allows investors to adjust their portfolios in response to changing market conditions and capitalize on emerging opportunities as the market stabilizes and moves higher.

In summary, August 2024 was a month of mixed outcomes for the Nigerian stock market, influenced by sector-specific performances, macroeconomic trends, and broader market dynamics. While the industrial goods sector and major stocks like Dangote Cement led to a market decline, certain equities showed substantial gains. The macroeconomic indicators, including GDP growth and inflation trends, reflect a complex economic environment. Investors should remain vigilant, considering both market indicators and broader economic conditions when making investment decisions. Sector rotation and a focus on undervalued stocks may offer potential benefits as the market adjusts and evolves.

NGX Industrial Goods Index Monthly Chart