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Why pension index stocks are under-performing

stock market

Story highlights

  • Recently, NGX Pension Stocks have exhibited a bearish trend, resulting in a decline in market capitalization.
  • The NGX Pension Index, which measures the performance of approximately 40 listed stocks, declined by 11% between Q1 2024 and May 20, 2024. This contrasts with the broader market NGX All Share Index, which declined by only 2.5% during the same period.
  • Reflecting the index’s decline, the total market capitalization of the 40 component companies fell by 6.47%, from N51.7 trillion at the end of Q1 2024 to N48.3 trillion as of May 20, 2024.

Understanding the NGX Pension Index: 

The NGX Pension Index is designed to measure the performance of the top 40 companies on the Nigerian Exchange (NGX) in terms of market capitalization and liquidity.

The Index aims to provide a realistic and investable benchmark for the Nigerian equity market and its investors. Therefore, understanding its trends, whether bearish or bullish, is crucial.

  • Bullish Trend: A rising index indicates strong investor confidence, suggesting that the underlying companies are performing well and making them attractive to investors looking for growth opportunities.
  • Bearish Trend: Conversely, a declining index signals potential issues within the component companies, such as declining profits, regulatory challenges, or broader economic problems. It also reflects broader market sentiment, signaling caution or pessimism.

A review of the index shows that in the first three months of 2024, it exhibited a bullish trend, recording a 21.4% increase.

However, between March 2024 and the close of trading on May 20, 2024, the index declined by 11.02%, dropping to 3,500.71 points from its Q1 closing figure of 3,934.33 points. The decline moderated the Year-to-Date increase to 8%, trailing the All-Share Index (ASI) YtD gain of 36.4%.

Additionally, it falls short of the 27.92% increase recorded between March and June 2023.

Component Company Performance: 

Typically, a bullish or bearish trend of the index stems from the performance of the component companies. In 2023, for example, the pension index recorded an 81% YtD gain, reflecting a 44% increase in market capitalization to N37.96 trillion for the 40 component companies.

This surge in market capitalization was on the back of 36 gainers, with 14 of them, including Transcorp Hotel, Transcorp, NAHCO, Dangote Sugar, UBA, and Conoil, posting triple-digit share price growth.

The share price rally was probably driven by improved investor sentiment because of these companies’ impressive financial performance in the first nine months of 2023.

When companies perform well financially and show strong growth, it generally boosts investor confidence and attracts more investment, leading to higher share prices and increased market capitalization. This strong performance likely led to a sustained share price rally for these companies in Q1 2024, albeit with a reduced number of 24 gainers and a lower 34% growth in market capitalization to N51.7 trillion.

However, between March and May 20, 2024, shares of these companies have been bearish, resulting in a 6% decline in total market capitalization to N48.32 trillion.

The decline in total market capitalization of these component companies after Q1 2024 can be attributed to the 2023 full-year performance, industry trends, regulatory announcements, specific company news, etc.

The Sectorial Performance and Reasons: 

The overall decline in market capitalization of the index stocks was driven by the bearish trend in most of the component sectors, especially the banking and consumer goods sectors.

Banking Sector: The 10 banking stocks on the index, including Zenith, GTCO, ETI, FBNH, and UBA, experienced a decline in share prices, leading to a 24% decline in the banking stocks total market capitalization to N5.93 trillion from its Q1 2024 figure of N7.84 trillion.

This can be attributed to the CBN’s announcement of a new capital requirement, which mandates banks to raise additional funds to meet N500 billion share capital.  This regulatory change likely deteriorated investor sentiment and confidence, contributing to the decline in their share prices.

Consumer Goods Sector: Similarly, except for Guinness and BUA Foods, the other seven stocks on the consumer goods sector experienced a decline in their share prices, leading to a 3.26% decline in the sector’s total market capitalization to N8.6 trillion. International Breweries, Nigerian Breweries, Flour Mills, Dangote Sugar, Nestle, Cadbury, and Vitafoam all experienced declines in their share prices.

The decline in the consumer goods sector could be attributed to the poor performance of most of the companies as reflected in their 2023 and Q1 2024 results.  For instance, the brewers; Guinness, International Breweries, and Nigerian Breweries, reported a combined pre-tax loss of N265 billion in 2023 and N211 billion in the first quarter of 2024.

Industrial Sector: The industrial sector also experienced a bearish trend. Dangote Cement saw a 4.37% decline, WAPCO (Lafarge) lost 12% of its value, while BUA Cement remained flat. This decline can be attributed to reduced profitability among cement companies in 2023 and Q1 2024, driven by elevated foreign exchange costs and high interest expenses.

When companies report lower earnings, it affects their valuation. Investors often value companies based on their earnings potential, and reduced earnings can deteriorate investor sentiment, which can result to a shift to other stocks.

Overall, the underperformance of the NGX Pension Index stocks, as highlighted by the recent bearish trends, reflects broader economic and sector-specific challenges.  Investors should be mindful of these trends and consider the underlying factors affecting the market.



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