Is the NGX All Share Index Overvalued? : Zero Equilibrium® Macro-Based Analysis if the Nigerian All Share Index from a Minskian Perspective.
– By Chinedu Okoye
Summary:
• The NGX 30 growth closely tracking the broader NGX ASI on an intraday, monthly and annual basis (+0.53% vs +0.54%), shows a balanced growth in the index as large caps aren’t lagging while small/mid caps aren’t outperforming.
• The NGX 30 provides the bulk of influence as it accounts for roughly 70% of the ASI, with Banking (30%), MTN (25%), Industrials (20%), Oil & Gas (7.5%), Consumer Goods (7.5%), and other stocks (10%).
• The rally is powered by both institutional money (pension funds, asset managers) and retail participation, with visible large block trades confirming broad-based and synchronized market activity.
• A Minsky moment would not be surprising as the market is likely in the Speculative phase, where core drivers rise with the rest of the market, but some stocks remain closer to Hedge or Ponzi phases, making the NGX 30 vs ASI divergence and small/mid-cap optimism early warning signals.
• The market shows healthy expansion, at the moment, however that doesn't rule out the emergence of peculative excesses. Prudent investors positioning would likely favor liquid, value-oriented large caps. But investors would be wise to hedge with USD or gold-linked assets to manage Naira (and USD in the case of Gold) inflation risk.
1.0 A Balanced Growth:
The NGX 30 trading ≤ % growth of entire NGX year-on-year, means large caps are not lagging meaningfully and and small/mid caps are not vividly outperforming. The NGX 30 is up+0.53% and the NGX ASI +0.54%
The NGX 30 accounts for a minimum 70% of the entire NGX ASI, as the entire NGX 30 contains stocks like Zenith, MTN, Dangote Cement, and other Consumer giants.
2.0 NGX Weighing and Valuation:
You can there for think of he NGX 30 companies as cover drivers if the index. While the rest (the remaining 30% of the index) as volatility amplifiers and sentiment indicators. So you have a situation where both the core and sentiments are driving growth of the NGX.
• Banking stocks in the NGX 30 (Zenith, GTVK, Access, UBA and First Bank): 30% of NGX ASI.
• NGX 30 Telco's which is only MTN account for 25%
• Industrials (BUA, and Dangote Cement) contribute 20%.
• Oil and Gas (Seplat and Oando) 7.5%
• Consumer Goods (Nestle, Dangote Sugar and Nigerian Breweries) contribute about 7.5%
Other NGX 30 names make up the rest 10%.
(These are approximate figures based on the valuation of each company and industry mentioned relative to the entire NGX ASI)
3.0 Synchronized Growth and Real Value Pricing:
So we have a market driven by both Insitituional liquidity and retail liquidity. This makes for a synchronized and broad rally, with a lot of Institutional money (with staying power eg Pension Funds, and highly funded Asset Managers), or other high powered money, in addition to the increased access and participation of retail investors.
It's not just retail moving the markets but insitiuitons as well, there's been a lot of large block trades shown in the volume of a lot of shares traded.
Markets are now pricing in real value (or most of the markets), after the nominal pricing has taken place in the past 18 months. But not all assets are fairly it appropriately priced as I explain below. So there's more upside for quality stocks.
4.0 More Upside for Quality Stocks:
Because this happened in the first hour of trading or less, and held till close, it would suggest that there were a lot of pre-market and post-market orders, meeting much thinner supply (from more sellers holding or from an exponential rise in demand relative to supply). As a result price discovery might move towards still, for a number of stocks.
5.0 Is a Bust Imminent?
If there's a risk of a fall out, it is not today, however it does seem like a market that had moved from ‘hedge’ to ‘speculative’ financial postures. The three financial postures - a Minskian terminology - are; Hedge, Speculative, and Ponzi Financing ( you can also look at it as three phases of a bull-run)
1. Hedge: Smart money accumulation, and cautious valuation, and Insitituions quietly accumulate (this was between Q3 2023 and Q2 2024)
2. Speculative: Broader participation and Insitituional confirmation. Core drivers rise with the rest of the market (non-core the remaining 30%), visible voluminous trades and broader market participation. (This was between Q3) A transition towards speculative financing.
3. Ponzi: Here euphoria rules and sets asset pricing as markets enter positions based more on hope and past performance, than factual and verifiable logic/data. Small caps start outperform, valuations fall as fundamentals become secondary, and lastly leverage (people are already borrowing to buys stocks).
[At this point the more seasoned investors offload or pause for a correction, depending on their liquidity and investment philosophy. This causes the NGX 30 to slow diwn, however the rest of the NGX ASI (with a lesser weighting ot share of the index) rises pulled by the increasing valuations of the small to mid caps.]
6.0 ZE Subjective Remarks:
From the above, we draw that there are some stocks that are riding on liquidity-driven pricing, as we enter phase two of the bull cycle (broad participation and Insitituional confirmation - the [probable] reason the NGX 30 is closely up.
6.1 The Uneven Valuation and Mispricing:
Though the market may be at the second phase, some stocks are closer to the phase 1 (hedge), and some closer to phase 3 (Ponzi). Finding out which stocks are in either category of the phase 2 bull cycle becomes the million dollar question.
However telltale signs to offload growth stocks would be;
1. An NGX 30 - NGX ASI divergence.
2. Small to mid caps pumping hard on optimism and not fundamentals.
At this point, the market switches from a healthy (or balanced) expansion, to fragile speculation.
The ongoing rally in the NGX is clearly showing signs of a broad-based expansion phase in the Minskyan sense. Here both large-cap, institutionally driven equities and smaller, sentiment-driven stocks advance in tandem.
This alignment is suggestive of both improving fundamentals or liquidity conditions, and a systemic rise in risk appetite. However, as Minsky posits in his Financial Instability Hypothesis (FIH), such stability often leads to speculative behavior (markets investing absent due diligence, ”sows the seeds of future fragility”.
6.2 What ZE is Doing:
This is particularly true where speculative excess begins to outpace the foundational strength provided by large cap anchors. Whether or not we see a Minsky moment soon is anyone's gyes, however it would be lrudent to rebalance ones stock portfolio in favor of solid, liquid and value stocks. And possibly hedge with another asset class that protects Naira Inflation (USD or Gold raw or backed assets).
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