Investors in Nigerian equities may earn an average double-digit return of about 16 per cent this year, in spite of the bearishness that started the year.
Quoted companies on the Nigerian Stock Exchange (NSE) have so far this year recorded negative average return of -16.22 per cent, according to the opening data this week. Nigerian equities had ranked among the worst-performing stocks globally in 2014 with average full-year decline of 16.14 per cent. Aggregate market value of all quoted equities closed 2014 at N13.226 trillion as against its opening value of N11.477 trillion for the year, indicating a loss of N1.75 trillion during the year.
Leading investment and finance company, Vetiva Capital Management Limited (Vetiva), stated that Nigerian equities have been significantly undervalued by the previous bearishness and would witness considerable recovery this year.
Analysts at Vetiva noted that while the performance of the equities market will correlate with the global oil price trend, a mid-point analysis suggests that Nigerian equities can make potential average return of 16 per cent this year.
Analysts pointed out that while valuations appear relatively cheap, sustained pressure on oil prices will likely continue to constrain investor re-entry into equities. Analysts thus anchored their 2015 return expectation for the All Share Index (ASI) of the NSE on oil price performance in the year.
According to analysts, using 16 year data, a correlation factor of 72 per cent between Brent crude prices and the ASI was established. The assumption of Brent crude recovering to $70/bbl by year end indicates a 22 per cent recovery from 2014 end position; thus, factoring in 72 per cent correlation suggests that amidst much volatility, the ASI holds a potential 16 per cent return in 2015 to 40,201.56 points.
“Our scenario analysis indicate that at $100/bbl level, ASI would hold a potential 54 per cent return for the year, whilst at $20/bbl price level, the return potential is -47 per cent. Given that the market selloff in the final quarter of 2014 was broad based, we believe a market recovery in 2015 will equally be broad based,” Vetiva stated.
“We expect a moderate recovery in oil prices in 2015, driven largely by a marginal improvement in global economic growth, which should support demand, but will still be overshadowed by supply, stemming any sustained rise in the oil price. Our sense, however, is that the prospects of a sustained recovery will be based on whether price weakness triggers substantial reduction in non-OPEC supply and/or a cut in OPEC production either at the June 2015 meeting or earlier. The former could be influenced by the risk of delayed shale projects if prices stay well below projected break-even for too long, and the latter by the risks of running large budget deficits and lower growth prospects resulting from depressed oil revenues. Other risks that could trigger an uptrend in oil prices would be: supply disruptions in the Middle East, an aggressive build-up in China’s Strategic Petroleum Reserves (SPR), and a more intense winter in the US These events however need to be significant enough to alter oil market fundamentals by tightening supply in order to sustain the oil price rebound. In our core scenario, we expect the Brent to gradually rise from the current levels to US$60/bbl by first half of 2015, and up to US$70/bbl levels by year-end 2015,” Vetiva noted.
The investment and finance firm outlined that analyses of key sectors on the NSE revealed tough operating conditions across board noting that while the banking sector is attractive with low valuations, banks would have to navigate a difficult operating environment decline in global oil prices. Banks’ exposure to the oil & gas sector has come under the spotlight with fears of possible loan default even as the oil & gas value chain account for the biggest share, an average 25 per cent of banks loan portfolios. However Vetiva indicated that average non-performing loans for the banking industry would remain under the regulatory ceiling of 5.0 per cent at 4.6 per cent in 2015.
“Whilst we estimate gross earnings will grow marginally in 2015, we expect the pressure on efficiency to persist. Nonetheless, we forecast an average six per cent earnings growth for our coverage banks in 2015, driven by the low 2014 base for the top tier banks,” Vetiva noted.
Analysts said the consumer goods sector will be challenged by further hits to consumer wallets amidst declining government spending. Already, the Federal Government has announced some austerity measures including a luxury tax on private jets and spirits, a generally more aggressive stance on the collection of taxes, with other measures expected to be announced during the course of 2015.
According to analysts, the biggest risk to consumer spending is the probable complete removal of fuel subsidy after the February 2015 general elections given the events that followed the partial removal of fuel subsidy in 2012 and possible fallouts should oil prices rebound in the second half of the year. Other events that would contribute to pressured consumer wallets in 2015 include the hike in electricity tariffs under the Multi-Year Tariff Order and tariffs on car importation.
“We expect cost of borrowings to inch up in line with the tighter credit environment with attendant impact on earnings performance of consumer goods manufacturers in 2015. We expect low valuations in the upstream oil and gas space to trigger a couple of mergers and acquisitions in 2015. Downstream operators will be net beneficiaries of the oil price decline as the all-in cost of refined products fall; we also expect that operators will enjoy wider margins on non-regulated products. We forecast aggregate earnings growth of 18 per cent for downstream majors, boosted by reduction in financing costs,” the 2015 outlook report by Vetiva stated.
Analysts said macro headwinds will put a dampener on demand outlook for the industrial goods sector like cement and building construction, as government and private expenditure growth come under pressure. They nonetheless noted that the low 2014 base will provide modest room for growth as cement producers diversify energy supply risk. Vetiva estimated a 10 per cent growth for cement consumption in 2015.
On the fixed-income market, Vetiva expected 2015 to open to healthy domestic demand for fixed income securities given the strong and positive real returns on offer and flight to safety from equities by pension funds.
Analysts noted that along with strong domestic demand and relatively attractive re-entry levels, there is room for compression in yields in the second half of 2015 as macros become more benign. They however added that risks to this outlook include a quicker than anticipated increase in the United States Fed funds rate which could incite market sell-off and a lower-for-longer oil price which could leave the economy in a twin-deficit situation.
“In first half 2015, we expect the Monetary Policy Rate (MPR) will remain unchanged at 13 per cent but further tightening could come by raising the Cash Reserve Ratio (CRR) on private sector deposits to 25 per cent if conditions deteriorate further. By second half of 2015, based on our expectation of a recovery in oil prices, we think monetary policy could be slightly relaxed with 100 bps reduction in the MPR,” Vetiva stated.
Analysts noted the macro background to the financial markets’ performance citing the February 14 elections and oil revenue as major determinants of the macro outlook.
“Amidst a global backdrop of still fragile growth and multiyear low oil prices, Nigeria will hold crucial elections in February 2015 in what is expected to be the most keenly contested in the country’s nascent democracy. With oil revenues making up c.70 per cent of Government revenues and c.80 per cent of exports, low oil prices will no doubt challenge the Nigerian economy in 2015. Following from this, we expect growth to weaken to 5.5 per cent, driven by slower growth in net exports, government consumption expenditure and private household consumption expenditure amidst modest growth in investment demand,” Vetiva indicated.
Analysts projected that inflation rate will average 8.8 per cent in 2015, higher than the average of 8.1 per cent recorded in 2014, largely reflecting pass-through effects of higher domestic prices via imports, following the devaluation of the Naira to Dollar
Analysts expected further devaluation in Naira noting that Nigeria is also at a risk of running a current account deficit.
“Taking into account the elevated risks to the naira, market uncertainty in the near term, and the risks of running a current account deficit, we forecast an interbank exchange rate of Naira to Dollar at N202/$ by end 2015, with the current account deficit of 0.81 per cent of GDP in 2015 as against surplus of 2.69 per cent in 2014,” Vetiva noted.
The pace of world growth in 2014 was disappointing, particularly in the Eurozone, Japan, China and many other emerging economies. The United States (US) economy held the bright spot, driven by an improving labour market, a modest housing market recovery and rising capital expenditures.
In 2015, Vetiva expects a modest improvement in global economic growth supported by central banks’ efforts at sustaining the fragile recovery. The recent International Monetary Fund (IMF) World Economic Outlook (WEO) estimates reflect this cautious optimism with 2015 global growth forecast of 3.8 per cent more upbeat than the 3.3 per cent recorded in 2014, albeit a downward revision from the 4.0 per cent forecast in the October WEO publication. Other global themes are likely to revolve around low global inflation, periods of volatility associated with rising US rates and low commodity prices.
Analysts noted that the US economy is in a cyclical upturn and is one of the few economies expected to accelerate in 2015 on the back of an improving housing sector, strengthening household consumption growth, further growth in business investments and a narrowing fiscal deficit. Reflecting this optimism, the IMF had projected US GDP growth at 3.1 per cent in 2015 as 2.2 per cent in 2014 although the pace of expansion could be tempered by slower growth in other regions, considering that projections for major trade partners such as Japan and China are modest at 0.8 per cent and 7.1 per cent respectively compared to 1.0 per cent and 7.4 per cent in 2014.
“Following the completion of the asset purchase program in 2014 and recovery in the US economy, the question is – when will the Federal Reserve raise rates? The minutes of the recent FOMC meetings tells us that this depends on the pace of recovery in the labour market and the quickening of inflation. Market expectations are that the Fed will start tightening mid-2015 but only at a gradual pace. Overall, this points to lower global liquidity although we expect that monetary tightening in the US will be somewhat offset by expansive monetary policy in the Eurozone and Japan as these economies battle deflation,” analysts noted.
The Benchmark Brent Crude oil price declined 48 per cent in 2014 to multi year low of $57.33/bbl. This sharp decline which happened in the second half of the year was largely on the back of oversupply triggered by an increase in non-OPEC production-US, Canada and an unexpected increase in OPEC production-Libya, Iraq. Other factors were the modest growth in emerging economies which softened demand and strengthening of the US dollar.