Nigerian Investors Tipped to Ignore Signs Stocks Are Overheating

(Bloomberg) -- Technical charts studied by some analysts to predict market moves suggest the world-beating rally in Nigerian stocks is overdone. Yet, Lagos-based analysts expect local investors seeking returns to keep buying, because they have few alternatives.

Nigeria’s main stock index is up 31% this year, making it the best-performing benchmark among the 93 that Bloomberg tracks globally. It’s set for a fifth month of gains, the longest such winning streak since 2017.

Low interest rates on government debt are pushing Nigerian money managers increasingly toward equities, even as a drop in oil prices and disruption from the coronavirus pandemic batter companies in Africa’s largest economy.

“What is happening is a diversion of funds from one asset class to the other,” said Wale Olusi, head of research at United Capital Plc. “Macroeconomic risk is high, but risk-free rates are extremely low.”

The frenzy for stocks are accompanied by some flashing warning lights: For instance, the 14-day relative strength index on the Lagos benchmark was at 92 as of Monday morning, well above the level of 70 that signals that gains may be overdone. Last week, the RSI touched the highest since 2006.

The benchmark index has also crossed above its upper Bollinger band, a sign seen by some traders as an invitation to sell.

The Lagos benchmark is trading above its 50-, 100- and 200-day moving averages, and testing technical resistance at 35,903.89. That level represents the 61.8% Fibonacci retracement from its losses since hitting an all-time record in 2018, and could be interpreted as a pivotal point when it comes to signaling long-term trends.

Even so, Olusi expects the rally in Nigerian stocks to have legs, given the government’s desire to keep interest rates low. That will damp demand for bonds, while any recovery in crude oil prices will also encourage stock purchases.

“The market will take profit at some point, but once the profit-takers are done, the buyers will jump in again until when dividends begin to trickle in,” perhaps by the end of the first quarter of next year, Olusi said. Stronger oil prices will make the central bank in Africa’s largest producer more confident “that it can pay back foreign investors and open up the market again,” which will drive equities even higher, he said.

©2020 Bloomberg L.P.