A reasonable improvement on the demand side of
equities with attractive valuations and good dividend yield should help the
Nigerian bourse reroute its recent loss path.
Year-to-Date (YtD), the Nigerian stock market
has lost circa N1.3trillion, as most foreign portfolio investors concerns that
are triggering sell-offs persist.
Analysts say investors (offshore and
domestic) cannot afford to ignore Nigerian equities current valuation, as they
offer reasonable re-entry opportunity for investors seeking capital
appreciation in the medium-to-long term. 
“After the elections and a seamless
transition, we are optimistic of increased confidence in the Nigerian equities
space. We envisage an improvement in market sentiments and activities from late
first-half (H1) 2015” said equity research analysts at Lagos-based
CardinalStone Partners.
Recent sell pressure at the NSE has affected
the major performance indicators. For instance, the volume of equities traded
at the bourse declined from a year-open level of 299.41 units to 59.12million
units as at Friday. The number of deals also dropped from 3,803 as at January 5
to 918 as at Friday January 23.
Also, in the same three-week period, the NSE
All Share Index has also dropped significantly by 4,223.04 points or 12.44%,
from 33,943.29 points to 29,720.25 points.
With the new supply dynamics that crashed the
price of oil by 58.1%, the 8.4% official devaluation of the naira, and widening
spread between the naira/$ rate in the interbank and official windows, as well
as uncertainty surrounding the coming general election, the equities market was
pulled downwards, as negative foreign investor sentiment led to significant
outflows from the market.
The Nigerian equities market is dominated by
foreign investors seeking higher returns than obtainable in their domestic
markets, usually more developed markets. For instance, at the Nigerian Stock
Exchange, foreign participation from January to November was 58.5% as against
domestic participation of 41.5%.
Analysts expect returning inflows will
quickly stabilise the naira, creating some exchange rate stability which would
be a catalyst for inflows into the equities market.
“With the YtD performance already almost
matching last year’s sell-off, we expect a recovery later this year, once the
uncertainties surrounding the macro environment start to dissipate. The
implication is that from current levels, a recovery of around 15% is likely,”
according to investment analysts at FBN Capital.
The analysts believe the recovery would
correspond with their view that the market is in oversold territory. “At
current levels, the market appears to be oversold, due to the indiscriminate
nature of the sell-off we saw in Q4 2014.
“However, if we assume that the new normal is
that of oil prices staying well below $100/barrel, then the macro concerns for
Nigeria – monetary and fiscal – are likely to cast a long shadow over the
markets, limiting the extent of any recovery. Notwithstanding, we do expect the market to stage a
recovery sometime this year. However, the timing is even more difficult, given
the uncertainty prevailing at the macro level,” FBN Capital analysts stated.
“Given the dominance of foreign investors in
the equities market, the impact of capital flight from frontier and emerging markets,
on the back of interest rate hikes in the US and UK, will have a significant
impact on the Nigerian equities market”, said analysts at United Capital plc.
They observed that given that the equities
market is yet to see considerable traction in domestic participation on the
bourse; foreign portfolio flows will continue to dictate the direction of the
market.
“The UK which has considerable interest in
the Nigerian equities market is expected to raise its interest rates from 0.5%
to 0.75% in third-quarter (Q3) 2015 according to the British Chambers of
Commerce. We expect this rate hike to also spur fund reversals to the UK”, the
analysts added.
Oscar Onyema, CEO, Nigerian Stock Exchange
said recently in his outlook on the market, that Nigeria’s 2015 macroeconomic
performance is expected to be influenced by a number of variables, including
crude oil prices, foreign exchange movements, national security, global
financial markets, fiscal and monetary policies, as well as the outcome of the 2015 elections.
“Post elections, we anticipate that
elimination of some of these uncertainties may lead to stability in the
equities market. However a
strengthening dollar may continue to precipitate FPI reversal, which remains a
real threat to the Nigerian capital market,” he added.
According to him, “Although economic growth
projections for 2015 will be greatly impacted by the challenges above, we
expect that as time progresses, and as uncertainty is steadily reduced across
all of the risk categories, negative sentiments in the market will begin to
subside, with volatility slowing in the second half of the year, strengthening
potential for a market rebound.”
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