Nigerian equities appear to be on a long shot of sell-off, with share prices crashing to their lowest. What is stoking the downtrend and what prospects for Nigerian quoted shares? Capital Market Editor TAOFIK SALAKO analyses the underlying currents behind the price movements and the dynamics that may shape valuations in future.
INVESTORS in Nigerian equities have lost N594 billion this month to capital depreciation and a downward trend that saw the equities market closing the first half of the year almost flat.
The average decline in the outgoing month stands at -4.29 per cent (equivalent of net capital depreciation of N606 billion). The continuous depression in July has eroded the marginal gain recorded by the close of the first half and left the market with negative average year-to-date return of -4.20 per cent.
From a net capital gain of about N1.7 trillion at the height of its rally in the first quarter, Nigerian equities closed the second quarter almost flat with average gain of 0.09 per cent for the six-month period ended June 30, compared with average gain of 8.53 per cent recorded at the end of first quarter.
Quoted equities had recorded average loss of 7.77 per cent in second quarter, equivalent to net capital depreciation of N1.13 trillion compared with capital gain of N1.384 trillion recorded by the end of first quarter. The All Share Index (ASI) – the common value-based index that tracks share prices of quoted companies on the Nigerian Stock Exchange (NSE) closed the first half at 38,278.55 points as against the year’s opening index of 38,243.19 points.
The Aggregate market value of all quoted equities on the NSE closed the six-month period at N13.866 trillion as against N13.609 trillion recorded at the beginning of the year (representing net gain of N257 billion or 1.88 per cent). The difference between the ASI and aggregate market value was due to supplementary listings of shares.
In the first quarter of the year, the ggregate market value of all quoted equities closed 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 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.
The Nigerian equities hit all-time high with market capitalisation of N15.3 trillion in January. The ASI rose to 43,041.54 points, its highest index points since October 2008. However, profit-taking fluctuations, which started in March worsened considerably into a swinging sell-off in May. The equities lost N1.15 trillion in May, equivalent of average month-on-month decline of 7.67 per cent. Nigerian equities had lost N557 billion in March and showed restraint with a modest loss of N44 billion in April.
The chequered performance of the stock market in first half 2018 counter-balanced the optimism, which started the year as local equities closed 2017 with full-year average return of 42.30 per cent, ranking among the top 10 best-performing equities across the world. The Aggregate market value of quoted equities closed in 2017 with a net capital appreciation of N4.36 trillion.
A year-to-date analysis at the weekend showed investors with average negative return of -4.20 per cent, the equivalent to net loss of about N571.58 billion when adjusted in line with the benchmark index. However, with differential addition of supplementary listing of shares, the face-value decline in market stood at N337 billion.
Most sectoral indices showed there were fewer safety nets for investors. From highly-capitalised to mid and low-capitalised stocks, from banking to consumer and industrial goods sectors, the bearishness was evident in the negative signs on major stocks. The NSE 30 Index-which tracks the 30 most-capitalised stocks at the NSE, is leading the benchmark index with negative average year-to-date return of -5.98 per cent.
The NSE Corporate Governance Index, which tracks companies specially ranked on corporate governance by the Exchange, carries a return of -4.54 per cent. The NSE Banking Index, which tracks the considerably influential banking sector, is running with average return of -3.69 per cent.
The worst performing stocks are in the consumer goods, oil and gas sectors. The NSE Consumer Goods Index showed above-average negative return of -12.23 per cent. The NSE Oil and Gas Index trailed with a return of -10.01 per cent while in the highly capitalised industrial goods sector, the NSE Industrial Goods Index showed a return of -9.76 per cent. However, insurance stocks, most of which had slumped below their nominal values, appeared to be recovering with the NSE Insurance Index, recording the only positive sector-specific gain of 5.28 per cent. Also, the NSE Pension Index, which tracks a basket of stocks specially screened in line with pension investment guidelines, showed a marginal negative return of -0.27 per cent. The NSE Lotus Islamic Index, which tracks stocks screened in line with Islamic rules, carried a negative return of -1.31 per cent while the NSE Premium Index-which tracks stocks on the premium board of the NSE, showed a promising return of 3.72 per cent.
Flight to safety or regular
price correction?
Segmental analysis of transactions at the Exchange indicated possible underlying trends driving the overall market position. Latest trading data on foreign portfolio investors showed a significant spike in selloff by foreign investors, usually an unnerving trigger that most times rouse the domestic bears. According to the trading, data on domestic and foreign portfolio investments (FPI) at the NSE, for every unit of purchase being made at the Nigerian stock market by foreign investors, they are selling two units.
The FPI report showed that foreign investors’ outflows from the equities market increased by 124.7 per cent to about N130.9 billion in May as against N58.25 billion in April. However, there was a 3.45 per cent decline in foreign inflows to N62.06 billion in May as against N64.28 billion recorded in April.
The FPI report used two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the stock market as a barometer for the economy. Foreign portfolio investment outflow includes sales transactions or liquidation of equity portfolio investments through the stock market while inflow includes purchase transactions on the NSE. The NSE report is generally regarded as a credible gauge of foreign portfolio investments in Nigeria as it coordinates data from nearly all active investment bankers and stockbrokers.
Month-on-month analysis had shown a positive trend in net foreign investment inflow throughout first quarter 2018. Foreign inflow totalled N91.75 billion in January 2018 as against outflow of N74.64 billion. Foreign inflow and outflow stood at N44.89 billion and N38.33 billion respectively in February 2018 while foreign inflow and outflow recovered to be N69.71 billion and N62.50 billion respectively in March 2018. In April 2018, there was a positive net foreign inflow of N6.03 billion with inflows and outflows at N64.28 billion and N58.25 billion respectively.
But a five-month analysis showed a similar trend in 2017 and 2018, with more FPI sales than buys, which may illustrate the speculative tendency of FPIs and post-earnings season portfolio realignments by fund managers. While the underlying speculative trading and portfolio management remain, most analysts believe the steep decline in share prices is being driven by political risks.
Political risks, macro uncertainties
Arrangements for Nigeria’s general election scheduled for May 2019 are underway and politics is the major news across the national news media. The two leading political parties-the ruling All Progressives Congress (APC) and the main opposition- Peoples Democratic Party (PDP) are realigning political forces for a showdown in what may turn out to be one of the most decisive elections in Nigeria’s history after APC dislodged the long-ruling PDP in 2015. In the political camps, it is a night of long knives. President Muhammadu Buhari has indicated interest to re-contest and he is favoured to be the candidate of the ruling APC, but PDP is gathering dissenting voices in the APC and scores of other minority parties to present a formidable opposition to Buhari, whose major scorecards are up for public scrutiny.
The political uncertainties have been compounded by the divisive internal politics of the ruling APC. Many within the ruling party appear not to share the same view of the anti-corruption campaign of the Buhari government, and there have been discordant tunes on major policy issues that ordinarily should be the focal points of the political party.
Despite being in control of the two chambers of the National Assembly, the government has struggled to get critical legislative supports including composition and passage of the national budget. Many analysts fear that the division between the Buhari-led executive government and the National Assembly may widen as the politicking takes shape.
“It is almost obvious. We have been seeing a lot of political meetings here and there, but nobody can say definitely where some people are heading to, some may leave APC, some may come into APC, but my advice to those that may be planning to leave APC is to reconsider their moves,” Executive Chairman, Alimosho Local Government, Hon. Jelili Sulaimon, said.
Investment pundits believe political risks and macro-economic uncertainties are major dynamics in the downtrend at the equities market. Chief Executive Officer, Nigerian Stock Exchange (NSE), Mr. Oscar Onyema, attributed the performance of the equities market to the uncertainties in the macro-economic environment, making reference to government grappling “with the task of articulating a clear economic blue print for the short to midterm within which credible fiscal and monetary policies can emerge”.
“Since the market is a leading indicator, we cannot take our eyes off the ball and must continue to press for positive catalysts that will propel the economy to new heights,” Onyema said.
Managing Director, Afrinvest Securities, Mr. Ayodeji Ebo, said both corporate performance and evolving political environment were major factors in Q2 performance of the market.
According to him, as election activity kicks in, investors may trade cautiously prompting more volatility in the equity market.
In its outlook, Afrinvest Securities stated that the determining factors for 2018 including earnings fundamentals of companies; stability in the foreign exchange market and fund flow dynamics to emerging and frontier markets had been “skewed towards negative than positive” and are expected to continue to be the major themes during the second half.
“Although we had forecast a 19.8 per cent return for the market (base case), emerging events in 2018, especially policy normalization in global markets as well as risk factors around the 2019 general elections present compelling reasons to revise our forecast,” Afrinvest stated.
Analysts at GTI Capital noted that the slowdown witnessed in the stock market was due to both domestic and external factors, with the main domestic factor being the political climate.
“In the light of all these issues, our outlook for the Nigerian Equities in second half 2018 is moderately negative. From late August when the election season begins with the primaries, we expect the air of uncertainty which the election brings to weigh on the stock market causing increased selloffs by foreign portfolio investors, also influencing domestic investors to do the same,” GTI Capital stated.
Chief Economist, Vetiva Capital, Michael Famoroti said election risks have increased the uncertainties in the polity.
“Impending elections are also likely to induce greater economic uncertainty and distract policy and governance at the tail-end of the year, neither of which is positive for confidence or investment,” Famoroti said.
Vetiva said preparations for the 2019 general election would have pronounced impact on the local equities market. According to Vetiva, despite an improving macro-economic 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.
Fiscal, monetary divergence
Many analysts also believe that there is need for a better harmonisation of fiscal objectives and monetary policies to stimulate economic growth, a major driver of capital market trend. FBNQuest Capital Limited has described the main argument of the Central Bank of Nigeria (CBN) against interest rate cut as “overstated”. It said the economic outlook is ripe for a rate cut and start of easing. The Monetary Policy Committee (MPC) of the CBN had raised concerns that a relax of the current monetary stance will lead to distortion of the macro economy and possible exit of foreign investors.
“As a broader point, we have examined the data for the run-up to the 2011 and 2015 elections, and have not found macro turmoil in the series for money supply, inflation and the public finances,” FBNQuest Capital stated.
Managing Director, H. Pierson Associates Limited, Mrs. Eileen Shaiyen, said the country needs to implement fiscal and monetary policies that will considerably reduce interest rate and open up access to finance to Small and Medium Enterprises (SMEs) in order to drive national economic growth.
According to her, the only way to fast-track the nation’s economic growth through the SMEs is to drastically bring down interest rate and create access to finance.
She noted that the SME space is desperately in need of a stimulus that will unearth the potential of the sector and enable it to drive broad economic growth.
“But in the short term, while we are making that strategic change, we need to look at the issue of interest rate. If we can get interest rate down to single digit, it will make a world of difference,” Shaiyen said.
Analysts at FSDH Merchant Bank argued that the country’s economic recovery needs additional monetary policies to stimulate a broad-based growth.
FSDH pointed out that while the increase in the crude oil price and favourable crude oil production in the country have increased capital inflows and led to favourable trade balance, the economy is still vulnerable to the adverse movements in the crude oil prices and thus the need to stimulate other non-oil sectors to reduce these vulnerabilities.
“FSDH Research believes the inflation rate may drop to single digit mid-year, while the exchange rate should remain stable in the short-term. Therefore, there is a need for monetary policy easing to boost credit creation and stimulate economic growth,” FSDH said.
President, Association of Stockbroking Houses of Nigeria (ASHON), Patrick Ezeagu said the decline at the equities market might have been worsened by assets re-allocation from equities to fixed-income securities as investors run for the safety of the guaranteed returns to hedge against uncertainties.
Reading herd movements
With all these, investment pundits are almost unanimous on a cautious outlook for the stock market in the immediate period, but also agreed on the positive outlook in the medium to long-term. Analysts said investors in the capital market may struggle with low returns in the second half of this year and may end the year with less-than-previously projected returns. Major investment firms that had previously projected higher returns for equities have recently reviewed their projections downward.
“While still optimistic about the macro-economic climate over the second half of the year – highlighted by stable macros – the combination of heightened political concerns locally and continued external market risks necessitate a readjustment of our prior guidance to cater to a more cautious market outlook,” Cordros Capital stated in its mid-year report.
According to analysts at Cordros, in the short to medium term, sideways trading is likely to remain the theme in the absence of a near-term positive trigger. However, macro-economic fundamentals remain strong and supportive of gains in the long term.
Also, Afrinvest has halved its base case to 10.0 per cent with a bear case of 2.2 per cent and bullish case of 18.3 per cent. This implies that equities’ return might hover between 2.2 per cent and 18.3 per cent, according to the investment firm.
Afrinvest also placed a higher probability of 50.0 per cent on its 2.2 per cent bear case scenario noting that market performance will continued to be pressured by capital flow reversals ahead of the 2019 general election.
“Nevertheless, we do not rule out the possibility of positives that could boost sentiment; thus, we place a 30 per cent probability on our base case scenario with the most unlikely 20 per cent chance of occurrence on our bull case. Even though our revised market projection suggests reduced return for 2018, we still expect a positive performance for the year,” Afrinvest stated.
In its second half 2018 Outlook Report on the nation’s economy, key sectors and capital markets, Vetiva Research predicted that average full-year return for equities this year will be between -5 per cent and +5 per cent.
The investment firm, however, reiterated its positive outlook on the equities in the medium to long-term, noting that local equities have considerable underlying value.
“Comparable multiples with peers suggest the Nigerian equity market remains undervalued. We maintain a strongly positive post-election outlook on Nigerian equities,” Vetiva stated.
The performance of the nation’s stock market may also be boosted by positive perception of emerging markets by major foreign investment firms. Bloomberg last week reported that three of the world’s largest fund managers hold positive view of an imminent rally in the emerging markets. According to the report, strategists and investors from Goldman Sachs Group Inc, Franklin Templeton Investments and BlackRock Inc hold that cheap prices, rising corporate profits and strong fundamentals will outweigh risks to drive the performance of emerging markets. The report noted that the performance of emerging-market equities relative to United State’s large caps, as measured by the spread of rolling three-month returns, is near a threshold of -17 per cent, which has not been breached since the global financial crisis. The report noted that while calling the bottom is never easy, developing-nation stocks have rallied an average of 32 per cent in the 12 months after their deepest draw down of the year, according to data compiled by SunTrust Private Wealth.
EFG Hermes, a leading financial services corporation in frontier and emerging markets, last week concluded arrangements for a direct entry into the nation’s capital market noting that Nigerian market “has a compelling story to tell investors”. EFG Hermes entered into a definitive sale and purchase agreement (SPA) to acquire 100 per cent of Primera Africa, a top-ranked stockbrokerage house in Nigeria. EFG Hermes, which expects to complete the acquisition by August 31, 2018, will utilise Nigeria as a hub for expansion into West Africa.
“Nigeria is our fourth direct entry as we continue our strategy of expanding our geographic footprint in high-potential, frontier emerging markets,” EFG Hermes Holding Group Chief Executive Officer, Karim Awad, said.
Co-CEO, Investment Banking, EFG Hermes, Mohamed Ebeid noted that Nigerian capital market, as well as its economy, has strong potential.
“We are entering a market that has a compelling story to tell investors. It is not just one of the largest and most economically diverse frontier markets globally; it is a growth story that has years to run after a series of structural reforms and a devaluation of the national currency. With oil prices now recovering, with significant portfolio inflows, and with the demonstrated ability to tap global debt markets, Nigeria will benefit from broad currency stability, we expect, remaining attractive in valuation terms at the same time,” said Ali Khalpey, the London-based CEO of EFG Hermes Frontier.
Political risks and related macro-economic risks may be rubbles covering the gold crust, investors may need to dig deeper and look beyond the immediate horizon to uncover long-term value. Staying ahead of the herds requires having fair idea of when the bulls will charge.
