Dec 25 (Lagos) -2018 began on a positive note as the Nigerian Stock Exchange All-Share Index (NSE ASI) notched a 9% gain in Q1 18 amid significant foreign interest, a trend which surfaced in Q2 17 following the introduction of the NAFEX window (NSE ASI gained 42% in 2017).
However, investor uncertainty emerged in subsequent quarters, with the ASI dipping 8% and 14% in Q2 18 and Q3 19 respectively, driven by pre-election jitters and weak emerging market sentiment. In addition, fears over an over-supplied oil market in 2019 drove Brent crude price below $60/bbl in November, just a month after a four-year peak of $86/bbl, raising concerns over the medium-term stability of the exchange rate.
Analysts at Vetiva Capital Management Limited in Victoria Island see three major drivers for the Nigerian equity market in 2019: the local political landscape, global sentiment towards emerging markets, and domestic macro-economic fundamentals.
On the political front, analysts anticipate a rocky start to trading in the equity market as elections draw near. Historically, the periods before major elections in Nigeria have been characterized by a steer clear and monitor approach by foreign investors and local investors. Unsurprisingly, the ASI shed 4% on average in Q1 11 and Q1 15, the previous election years. We expect a similar trend in Q1 19, particularly as foreign investors monitor developments in the global oil market and Sino-American trade negotiations.
We note that foreign investors accounted for 49.38% of market activity in 2018, despite sizable capital outflows. Finally, we expect currency pressure to persist through the year and forecast only modest economic performance (2019 GDP growth: 2.7% y/y) and do not expect macroeconomic developments to provide much market joy in 2019.
Coupled with our expectation of adverse external conditions in 2019, we anticipate modest post-election equity market performance and project a market return between -5% and 5%, with a point estimate of 2.5%.
General elections to remain centre of attention
Equity markets are known to be vulnerable to political activity especially in the build up to major elections. We highlight that the ASI has enjoyed a post-election rally in the two most recent election years, with an average return of 3% in the quarter following the past two general elections. Post the 2019 we expect reduced political and policy uncertainty to placate investors but note that investor sentiment could remain muted until the official swearing in (June 2019) as attention turns to prospective policy and security risks.
In our view, significant security threats are unlikely as Nigeria’s democracy matures. That said, we recall that in 2015, investors reacted poorly to the new administrations failure to appoint a cabinet for over six months after swearing in. We expect greater clarity in policy direction this time around, regardless of the eventual outcome of the election.
In terms of prospective candidates, we note that the incumbent holds the upper hand in his ability to provide the stability craved by financial markets whilst the primary opposition candidate has been touted as a more pro-business figure could generate stronger enthusiasm. We assess scenarios below:
Adverse external environment dims equity market prospects
The Nigerian equity market was buffeted in 2018 by heightened trade tensions between the U.S and China, volatile commodity prices, and monetary tightening in the United States. We expect these factors to remain relevant in 2019. On the trade front, we acknowledge the 90-day truce between the two parties but still expect some level of discord during the year.
Meanwhile, our outlook for the crude market also remains weak, with a forecast of $60/bbl for Brent crude, as OPEC cuts are unlikely to fully address the oversupply in the market. Finally, we anticipate higher global interest rates, with the U.S. Fed expected to implement three rate hikes and as a fallout of the end of quantitative easing in the Eurozone, which would induce further net capital outflows from emerging & frontier markets like Nigeria.
In summary, global sentiment towards the Nigerian market is likely to be weaker in 2019 due to slowing global economic growth, fears over trade tensions, stronger policy rates in the U.S. and Europe and lower crude prices. Given the significance of foreign portfolio flows, we anticipate muted market performance in 2019.
Corporate performance to provide little market boost
We anticipate acceleration in both economic growth (1.8% in 2018 to 2.7% in 2019) and inflation (12.2% in 2018 to 12.6% and 2019) and expect only modestly positive economic performance in 2019 and corporate performances will continue to mirror the sluggish economic recovery. Amid this, we do not see much macro support for the equity market as investors are unlikely to be swayed by improvements in the broader Nigerian economy without improvements in corporate performance.
The banking sector has been the strongest performer in the market this year, with banking stocks posting the lowest declines (-16%) in a bearish market (-20% YTD), and retaining their status as the top-traded stocks. Nigerian banks are underpriced compared to other African countries the sector trades at a PE of 4.54x and has the highest dividend yield among key sectors on the domestic bourse at 7.70%.
We expect continued recovery in the economic climate will continue to support growth in non-interest income, amid stronger economic activity, while growth interest income will remain subdued as banks remain weary, with flat growth in banks loan books.
Consumer spending in 2019 is expected to be marginally bolstered by election spending and the proposed increase in minimum wage. As such, analysts expect modest growth in the Consumer Goods sector, further buoyed by better financial performances from food producers such as FLOURMILL
and DANGSUGAR. However, expectations for the sector are dampened by the prospect of a weaker currency in the latter part of the year.
Driven by stronger earnings performances, we anticipate a recovery in the Industrial goods sector, which has been the worst-performing key sector so far in 2018 (-73.38% YTD). Specifically, we see the recovery heaviest on WAPCO
as earnings growth is oversized by a particularly weak 2018.
Oil & Gas
In the Upstream sector analysts expect slightly lower revenues amid lower oil prices and stable production volumes. Meanwhile, in the downstream sector, barring partial or full deregulation of the sector, margins will remain slim and potential for growth also limited, meaning no likely improvement in investor perception of the sector.
The NAFEX window: a microcosm of investor sentiment?
Notwithstanding minimal currency depreciation in 2018 exchange rate moved from NGN361/USD in January to NGN364/USD in November there has been visible pressure on the currency amid sizable capital reversals.
In 2017, the Central Bank provided just 8% of inflows into the NAFEX market while foreign portfolio inflows (FPI) accounted for 51%. In 2018 the apex bank supplied 25% of the dollar inflows whilst FPI contribution dropped to 41%.
We recall the significance of NAFEX window in influencing investor sentiment: the NSE
ASI rallied 36% within two months of the window opening, compared to a -5.36% performance previously.
In 2019, we expect the CBN to be a more prominent supplier in the market as it seeks to minimize currency depreciation, but we highlight that investors would be concerned about the perceived inflexibility of the market-determined exchange rate, as well as stability in supply. Under our base assumption of a currency depreciation to NGN390/USD, we foresee decent investor confidence in the integrity of the NAFEX window through the year, which would support equity market performance.
Weak market could see primary activity dry up
The primary market segment of the equity space was relatively healthy in 2019 as we saw the listing of two new companies on the exchange ( NOTORE and SAHCO ) and a combined market capitalization of c.₦130 billion added to the market.
However, the total value raised from rights issues in declined from N 340 billion in 2017 to N 130 billion in 2018 (including the proposed N 90 billion WAPCO
issue). Analysts attribute this to the post-January slump in the Nigerian equity market (ASI 30.97% down since the end of January) which discouraged corporates from raising additional share capital even as cost of debt moderated through the year.
We expect the 2019 primary market to be drive by Bureau of Public Enterprises-led listing of privatized state-owned enterprises (SOEs) including Indorama Eleme Petrochemicals, Nicon Insurance, and Nigerian Machine Tools.
More importantly, we are doubtful about a quick resolution of the disputes that have dogged the proposed MTN Nigeria listing which had been expected in 2018. In addition, we do not anticipate much activity in terms of rights’ issues as company valuations would still be relatively depressed for most of 2019 and we also highlight the significant deleveraging that occurred across key sectors in 2017/2018.
Source - analysts at VETIVA CAPITAL MANAGEMENT LTD IN VICTORIA ISLAND. ALL VIEWS, OPINIONS, TARGETS AND FORECAST EXPRESSED IN THIS ARTICLE ARE THOSE OF ANALYSTS AT VETIVA CAPITAL MANAGEMENT LTD. EASYKOBO DOES NOT ENDORSE OR OPPOSE ANY VIEWS EXPRESSED IN THIS ARTICLE.
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