Buy quality long-term stocks, FSDH advises investors

By Taofik Salako, Capital Market Editor

The Nigerian stock market outlook remains cautious and investors should focus on accumulating quality stocks with potential to return good returns in the long-term.

Investment banking group, FSDH Merchant Bank Group, in its latest macroeconomic outlook released yesterday, advised investors to select stocks on the basis of attractive valuation, good fundamentals and potential for good return in the long-term.

Analysts at FSDH noted that while stocks are cheap at the Nigerian equities market, the short-term earnings outlook is poor while the financial markets remain volatile in the near term.

The report noted that the equity market could reap from the excess liquidity in the fixed income markets while stable oil price, improved economic growth figures could instill confidence in the market in 2020.

According to analysts, the significant drop in interest rates especially for short term securities could lead to some traction in the equity space. This factor will also limit foreign portfolio investments inflows (FPIs) in 2020 relative to 2019, although FPIs will continue to dominate total inflows relative to foreign direct investments (FDIs).

The report pointed several issues of ad-hoc and inconsistent policies, insecurity and poor infrastructure will limit the inflow of FDIs in 2020.

Analysts at FSDH predicted real GDP growth of 2.5 per cent, inflation rate of 11.9 per cent, average exchange rate of N370 per Dollar, average external reserves of $37 billion, Monetary Policy Rate of 14.0 per cent and private investment-GDP ratio of 25 per cent for 2020.

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“We expect external reserves to average $37 billion in the year. Slower FPI inflows would persist particularly in the early parts of the year, given the low interest rate environment. But, we believe that FPIs will continue to dominate total inflows in 2020,” FSDH stated.

Analysts at FSDH believed that the Central Bank of Nigeria (CBN) will continue to intervene in the foreign exchange market to ensure exchange rate stability, adding that with rising inflation and imminent inflation pressures following the land border closure and value added tax (VAT) increase, there may be a tight monetary environment in 2020.

According to analysts, to mop-up excess liquidity, the CBN and the Monetary Policy Committee (MPC) will adopt several monetary policy tools in 2020. In the first MPC meeting in January, the CBN increased CRR to 27.5 per cent, which is estimated to mop up an estimated N900 billion from the system.

The report indicated a positive outlook, in terms of finance for the real sector, noting that loan-to-deposit ratio and the open market operation policies of the CBN will result in increased lending to businesses and liquidity across markets in the year.

It added the implementation of the exemption of small businesses with turnover less than N25 million from companies income tax (CIT) by the new Finance Act will reduce burden on some small and medium enterprises while further stimulating their growth.

“Overall, the  underlying weak macroeconomic conditions will continue to cast a shadow on the performance of the financial markets and combined with policy uncertainty this is likely to feed into continued volatility,” FSDH stated.