Nigerian equities ended 2018 with full year average return of -17.81 per cent as investors rued political risks and macroeconomic uncertainties. Analysts believe that the general elections will impact on the market, reports Capital Market Editor Taofik Salako.
Nigerian stock market traded mostly on the negative side in 2018, closing the year with a negative average full-year return of -17.81 per cent. Aggregate market value of all quoted equities at the Nigerian Stock Exchange (NSE) declined by N1.889 trillion in 2018. Most quoted companies closed around their lowest prices as political risks, macroeconomic uncertainties and attractive yields in advanced economies kept investors nervous for the most part of the year.
The 2018 year-end performance was a major reversal for a market that had posted full-year return of 42.3 per cent in 2017. With net capital appreciation of N4.36 trillion in 2017, the market had set out gaily in 2018 with a stride. Quoted equities netted capital gain of N1.384 trillion by the end of first quarter of 2018 with equities capitalisation rallying to hit all-time high of N15.3 trillion in January 2018. The All Share Index (ASI)- the common value-based index that tracks share prices at the Nigerian Stock Exchange (NSE), peaked in January 2018 at 43,041.54 points, its highest index points since October 2008.
Far from the pundits
The ASI-which doubles as sovereign equities index and standard general measurement for the performance of Nigerian stock market, closed 2018 at 31,430.50 points as against its year’s opening index of 38,243.19 points, representing a decline of 17.81 per cent. Aggregate market value of all quoted equities also dropped from its 2018’s opening value of N13.609 trillion to close at N11.721 trillion, a decrease of 13.88 per cent or N1.889 trillion. Adjusted for additional shares listed recently and in line with the ASI, the net capital depreciation could rise to N2.42 trillion.
Several investors recorded worse returns during the year. Sectoral indices showed that investors in industrial and consumer goods companies suffered considerable losses, far above the average. The NSE Industrial Goods Index posted a 2018 full-year return of -37.34 per cent. The NSE Consumer Goods Index recorded -23.28 per cent. The NSE 30 Index, which tracks the 30 most capitalised companies at the stock market, declined by 18.87 per cent. The NSE Banking Index depreciated by 16.09 per cent. The NSE Insurance Index dipped by 9.25 per cent while the NSE Oil and Gas Index posted a loss of 8.61 per cent.
The decline, which started in the second quarter of the year, saw the stock market rolling from negative to negative in successive quarters. Aggregate market value of all quoted equities had closed the first quarter of 2018 at N14.993 trillion as against its year’s opening value of N13.609 trillion, representing a net increase of N1.384 trillion or 10.17 per cent. The ASI also rose from its 2018’s opening index of 38,243.19 points to close the first quarter at 41,504.51 points, representing average gain of 8.53 per cent.
However, Nigerian equities recorded average loss of 7.77 per cent in the second quarter, equivalent to net capital depreciation of N1.13 trillion. Profit-taking fluctuations that started in March 2018 worsened considerably into a swinging selloff by May 2018. Nigerian equities lost N1.15 trillion in May 2018, equivalent to average month-on-month decline of 7.67 per cent. Nigerian equities lost N557 billion in March and showed restraint with a modest loss of N44 billion in April.
The performance of the stock market in 2018 was a reversal of the strong gain recorded in 2017, when equities posted average full-year return of 42.3 per cent in 2017. With a net capital gain of N4.36 trillion in 2017, investors in Nigerian equities had technically recovered what they had lost in the past three years. The turnaround in 2017 represented a fillip for the hard-pressed Nigerian investors. The stock market had been on a losing streak since 2014. Investors lost N1.75 trillion in 2014 and followed this with another loss of N1.63 trillion in 2015. Against the general expectation that political transition and new government will quicken a rebound, equities closed 2016 with a net capital loss of N604 billion. Aggregate market value of all quoted equities on the NSE had closed 2016 at N9.247 trillion as against N13.226 trillion recorded at the start of trading in 2014, representing a net capital loss of N3.98 trillion.
The stock market performance in 2018 was generally against the expectations of most market pundits. Most pundits had been optimistic about a positive market in 2018. In its ‘Economic and Financial Outlook 2018-2022’ report, FSDH Merchant Bank Group had stated that Nigerian equities had potential to generate average return of 27.43 per cent in 2018. The report, prepared by FSDH Research, the research and investment advisory arm of the wholesale banking group, predicated its optimism on positive macroeconomic performance, noting that the Real Gross Domestic Product (GDP) could grow by 3.16 per cent and 4.09 per cent in 2018 and 2019 respectively.
“Thus we forecast a growth of 27.43 per cent in 2018, lower than the growth of 42.30 per cent recorded in 2017. We expect a strong rally in the equity market in the first half of the year 2018. We see investment opportunities in the banking, building materials and consumer goods sectors of the market,” FSDH stated.
FBNQuest Capital Limited, the investment banking subsidiary of FBN Holdings Plc, had also predicted that the Nigerian equities market could sustain a bullish run for the second consecutive year with a double digit return of 25 per cent in 2018. In its preview of 2018, FBNQuest stated that Nigerian equities may add to the 42.3 per cent full-year gain recorded in 2017, with a further 25 per cent gain in 2018 to push the benchmark index to 47,800 points. The report had envisaged that while the race for the presidency in February 2019 had started, political distractions might not have significant slowdown effect on the economy.
Presenting its special outlook report tagged: “Nigeria in 2018: Looking Beyond the Surface, Cordros Capital had outlined a positive outlook for the Nigerian economy and the equities market, noting that average return at the equities market could range between a modest return of between 10 and 15 per cent and a bullish performance as high as 40 per cent in 2018.
Capital Bancorp Plc, in its 70-page report tagged: Economic Review and Outlook For 2018, had outlined an overall positive outlook for the Nigerian economy and the capital market. Capital Bancorp had noted that several performance boosters could see Nigerian equities ending the year with average return of 25 per cent. “With ample opportunities in some stocks in the banking sector and consumer goods sector of the equities market, we have projected a 25 per cent return for the Nigerian stock market in 2018, though downward risks to achieving this target remain visible,” Capital Bancorp had stated.
What hailed the bulls?
Most analysts agreed that heightened political risk and macroeconomic uncertainties were major factors that adversely impacted the equities market in 2018. According to analysts, the intense political activities started earlier than expected and the tenor of the campaigns appeared to worry investors, especially foreign investors that account for more than half of transactions at the stock market.
Vice Chairman and Chief Executive Officer, Capital Assets Limited, Mr. Ariyo Olushekun said investors were apprehensive about the general elections as people wanted to see the direction of the political transition before making reasonably long-term investments.
“The main issue was the election and the uncertainties and apprehension that came with it. The polity was somehow heat up, especially before the primaries. The fears are still there, though reduced now, but people will still want to see the outcome of the elections before committing funds,” Olushekun, a former president of the Chartered Institute of Stockbrokers (CIS), said.
Chief Executive Officer, Sofunix Investment and Communications, Mr. Sola Oni, said the lackluster performance of market in 2018 was predicated on many exogenous factors including illiquidity in the system and massive share dumping by nervous portfolio investors and their Nigerian counterparts who are apprehensive of likely crisis during 2019 general election.
“The political risk was reinforced by unguarded utterances of the political class. Performance indicators at the Exchange obviously reveal that the market is under pressure. But market fundamentals remain strong as discerning investors are taking advantage of underpriced stocks to beef up portfolios,” Oni, a chartered stockbroker and financial journalist, said.
National President, Constance Shareholders’ Association of Nigeria, Mikail Shehu, said the crisis that bedeviled Nigeria’s apex capital market regulator, Securities and Exchange Commission (SEC), which saw the suspension of its Director-General and the refusal of the government to address other regulatory governance issues such as the composition of the board of SEC also affected the market.
“Some other actions taken by other regulators without consideration to the minority shareholders such as the takeover of Skye Bank also affected the morale of the investing public. We hope to see a better outlook in 2019 as soon the general election is over, when it is free and fair, and the new government starts the governance process,” Shehu said.
Managing Director, Cowry Asset Management Limited, Mr. Johnson Chuwku also attributed the decline in foreign portfolio inflow to political tension in the country noting that government needs to give assurance that the coming elections will be free and fair, and that the two major political parties will not create a major crisis.
“The major thing driving portfolio investors is not necessarily that the economy is weak; the economy is still quite strong. The underlying thing is that quoted companies are performing very well, but because portfolio investors are always wary of tensions in emerging markets, they are not willing to risk being caught in crossfire of political parties,” Chukwu said.
Vetiva Capital Management Limited, which had in the second half reviewed its projection downward to average full-year return of between -5.0 per cent and +5.0 per cent for Nigerian equities, noted that despite an improving macroeconomic environment and a semblance of policy stability, Nigeria’s financial markets would likely be steered by the fallout of electoral activities and rising global interest rates.
Managing Director, APT Securities & Funds Limited, Mallam Kasimu Kurfi, said the performance of the Nigerian market should also be viewed within the context of the slowdown in the global equities markets amid disputes between the major economies.
He noted that equities market globally recorded poor performance with major global indices such NASDAQ, Dow Jones, FTSE and JSE ASI among others closing lower than previous performance.
According to him, the poor performance of the global markets might not be unconnected with raising of benchmark interest rate by the United States of America (USA), trade war by USA and China and ongoing exit of Britain from the European Union among others.
“In the case of Nigeria, the introduction of FGN Sukuk bond with high yield encouraged many stockholders to diversify from equities into bond and commercial papers with high yields. Being an election period, also contributed to our poor performance as a result of divestment by foreign investors,” Kurfi said.
A shareholder, Eric Akinduro, also agreed that the performance of the market belied the generally steady improvement in corporate earnings, noting that the three major factors that adversely affected the Nigerian market were the exit of foreign investors, introduction of new fixed-income instruments by government and electioneering.
Much hope on post-election recovery
Despite a negative start that had seen the market with a net capital depreciation of N245.4 billion or average decline of 2.10 per cent in the first two trading sessions of the year, most analysts said they expected the market to close positive in 2019, rising above expected slow performance in the first quarter as the heightened political risks narrowed down into the closing phase.
Olushekun said the fundamentals of most quoted companies suggest positive outlook for the market citing attractive earnings yields, price to book ratios and dividend yields that show that Nigerian equities are undervalued and have considerable upside potential.
“This year you can expect to see a rebound. Last year was a flight to safety, but this year, after the elections, you will see a steady recovery. I see political stability and the continuation of the economic programmes of the government, most of which should underpin long-term development of the economy,” Olushekun said.
He advised investors to invest in companies with sound fundamentals and to seek the advice of their stockbrokers to determine the most appropriate timing to enter into the stocks.
Oni said the factors that would shape the Nigerian market in 2019 included the global economic performance, Nigerian political transition and implementation of key fiscal and monetary policies.
“In our own setting, the outcome of the next general election and ability of whichever government to tackle the ongoing economic challenges, especially investment in infrastructure, management of fiscal and monetary policies and specifically creating sustainable conducive business environment among others are expected to shape activities in the stock market,” Oni said.
According to him, discerning investors should take advantage of low valuation of stocks and strong market fundamentals to beef up their portfolios.
He added that emerging activities of commodity exchanges are expected to create more investment opportunities in the capital market as these are consistent with the government’s plan to increase investments in agriculture, which is the base of commodity products.
Vetiva Capital Management Limited stated that it was cautiously optimistic that the electoral process would emulate the 2015 election in delivering a peaceful and transparent process, which is expected to stimulate the market.
According to the firm, although 2019 economic performance is unlikely to be materially affected by the outcome of the elections, investor confidence can be significantly boosted by a favourable outcome and smooth process.
Analysts at Cordros Capital stated that the negative performance for the equities market will persist in the short term, amidst growing political concerns ahead of 2019 elections, and absence of a positive market trigger.
“Our outlook for equities in the short to medium term remains conservative, amidst brewing political concerns, and the absence of a positive trigger. However, stable macroeconomic fundamentals remain supportive of recovery in the long term,” Cordros Capital stated.
“In the coming year, we expect the equities market to resume trading on a weak note while anticipating a post-election rally across all indices on the local bourse,” Afrinvest Securities stated.
Akinduro said the stock market should witness a recovery in the first quarter of 2019 as companies release their 2018 full-year earnings reports and dividend recommendations.
Post-listing rules at the NSE require quoted companies to submit their full-year earnings reports, not later than three months or 90 calendar days after the expiration of the period. Most quoted companies including all banks, major manufacturers, oil and gas companies, breweries and cement companies use the 12-month Gregorian calendar year as their business year. The business year thus terminates on December 31. The deadline for the submission of the 2018 annual reports and accounts is expected to be Friday, March 29, 2019, the last working day of the first quarter.
Kurfi also said the outlook for 2019 looks brighter citing the low valuation of most stocks and the inflow of additional funds with the implementation of new investment structures that allow pension fund administrators to invest up to 75 per cent of their funds in the capital market.
According to him, the expected listing of MTN Nigeria before the end of the second quarter of 2019 will increase the depth of the market while the ongoing merger between Diamond Bank Plc and Access Bank Plc may trigger similar merger in other banks, thus stimulating the competitive banking sector.
He added that the demutualisation of the NSE will also improve the confidence of the market.
Publicity Secretary, Independent Shareholders Association of Nigeria (ISAN), Moses Igbrude, urged the political parties and other stakeholders in the political process to place the national interest above their personal interest and not to further overheat the polity.
According to him, the stock market will bounce back after the general elections when the tension in the polity is over.
“The year 2019 will be a very remarkable and active year for the stock market with a lot of activities across all sectors of the market. From Access Bank and Diamond Bank merger, insurance companies’ recapitalisation, to the divestment by Mr. Femi Otedola from Forte Oil, all these are indications that the new year is going to be full of possibilities. My honest advice to government and politicians is that they should be very cautious and mindful not to heat up the economy,” Igbrude said.
He urged government to provide conducive and favourable environment for businesses to thrive, pointing out that government should avoid policy inconsistency and untoward tax collection practices.
The outlook for the Nigerian stock market and the economy generally depends on the successful conduct of the February-March 2019 general elections. That appears to be a consensus among the analysts. But the global crude oil fluctuation and its broad implications on domestic fiscal and monetary management, especially foreign exchange (forex) stability and regulatory issues at the capital market, including the resolution of governance impasse at the Securities and Exchange Commission (SEC), which has been operating without a board and substantive executive management, will also moderate the performance of the stock market. In all, it is still uncertain times for investors, though the uncertainties appear less and the upside looks brighter.