Mixed first half swings market returns 

Coming off an impressive 2017 where the Nigerian Stock Exchange (NSE) All-Share Index (ASI) notched a 42% gain, analysts had expected 2018 to follow a similar albeit weaker positive path. This view was predicated on their positive oil price outlook and the anticipated domestic economic recovery, both of which were expected to buoy company earnings and support market sentiment. 

This trend played out in January as the ASI surged 16% amid significant foreign interest – foreign activity in equity totaled N166 billion in January. However, the post-January period has been generally downbeat as pre-election jitters and capital reversals weighed on the market. 

Whilst analysts had initially expected election effects to come into play towards the tail-end of the year, they revise their outlook to account for the heightened sensitivity of investors on this front. And although analysts are still relatively positive about the macro economy and corporate earnings, their H2’18 outlook is tilted bearish on the back of sustained tepid risk appetite ahead of the 2019 polls. Though they foresee a smoother and more peaceful campaign and electoral process, analyst’s conservative view is that foreign capital may sit on the sidelines – and enjoy rising yields in the global economy as well as stable political environment in other emerging markets – with domestic investors following suit. 

Analysts are unconvinced that expected modest earnings growth would be able to sufficiently support demand in H2’18 and are cautious on the impact of new PFA mutli-fund rules given the rolling implementation deadline and concerns shown by the PFA crowd. Overall, analysts anticipate a bearish market in the second half of the year but highlight the underlying attractiveness of the market especially in light of soft gains seen this year. 

Macro support for market vanishes 

Analyst’s initial positive expectations for the Nigerian equity market were predicated on strong economic performance through the year. So far, the economy has slightly underperformed (Q1’18 GDP growth of 2.0% vs 2.6% consensus expectation), but green shoots have manifested in moderating inflation (January: 15.1%, May: 11.6%), strengthening industrial activity, and high oil prices (Brent crude peak: $79.80/bbl in May). 

Nevertheless, the effects of this modest economic performance were little felt in the market in H1’18 as the market was on a downtrend for most of the first half of the year post-January (January return: 16.0%, Q1 return: 8.5%, Q2 return: -6.8%). 

In H2’18, the economic picture would provide a few things for the market to cheer; analysts expect inflation to continue to moderate to low double digits in H2’18 and ease pressure on manufacturers’ costs and consumer wallets, whilst a stable foreign exchange market and strong government spending should support demand in the economy. 

However, analysts are slightly less upbeat about this year’s economic performance, in light of enduring weakness in key sectors, delayed budget passage, and unexpected disruptions to oil production. As such, they do not see macro developments offering much support to the equity market in the second half of 2018. 

Stronger earnings expected. Will this help? 

Analysts anticipate stronger earnings across their coverage sectors in the second half of the year. In the Banking Sector, they still see the most value in Tier 2 names as earnings recover from recent lows – driven by modest real loan growth, moderating loan losses and contained operating costs. 

For the wider sector, pressure from lower yields on government securities and a likely moderation in derivatives income will be offset by a recovery in loan growth and expected increase in transaction velocity from improved economic activities. 

Analysts forecast higher revenues across Consumer Goods names as recovering volumes compensate for price cuts, and expect the sector to benefit from recent deleveraging and moderation in funding costs. They have a similar strong volume outlook for the Industrials Good sector, in line with Q1’18 trend, and on the back of expected government infrastructure spending at the tail-end of the year. 

Finally, analysts expect strong oil prices and production to support the upstream oil & gas space – albeit with some caution following ongoing challenges with key pipelines. Meanwhile, the status quo should persist across downstream players, with margin support and earnings growth likely to come from increased play in deregulated petroleum products. 

Overall, analysts are cautiously optimistic about earnings for the rest of the year, and although they do not see it as a strong enough influence to steer market direction, they expect the top tier names with decent fundamentals to remain investors’ toast in the second half of the year. 

Listings can lift market 

Weak market pricing and cautious investor sentiment have discouraged new offers in the last few years as most companies in need of funds maintained a watch and see approach. The space appears to be getting clearer in 2018 with a number of new listings, some of which include Skyway Aviation Handling Company (SAHCOL), Nigerian Reinsurance Corporation, Notore Chemical Industries, and most notably, MTN Nigeria expected to spring up soon. 

Analysts consider the spate of new listings to be positive for the market and foresee the major listings boosting market activity and liquidity. Moreover, they see these listings having a knock-on effect with unlisted companies in similar sectors beginning to look more closely at the equity market. Furthermore, analysts are hopeful that an active primary market would engender greater investor interest in the equity market, particularly in a year when foreign investors are likely to tread cautiously ahead of the 2019 elections. 

Analysts are particularly excited about the MTN Nigeria listing given its expected size and see it as a shot-in-the-arm for Nigeria’s IPO space. The Telecoms giant entry into the market should aid in efforts to deepen and diversify the market.

Market valuation calls for long-term bet 

The Nigerian market remains undervalued in comparison to peers. The NSE has lower P/E (11.0x) and P/B (1.7x) ratios than South Africa’s JSE (14.1x and 3.8x), MSCI Frontier Markets Index (12.3x and 1.8x) and MSCI BRICS Index (14.9x and 1.8x). For analysts, this underscores the long-term appeal of the market. Moreover, they note that the equity market was in a similar position in early-2017; a combination of the oil price crash, recession, and foreign exchange scarcity had triggered large capital reversals which caused the market to lose 35% of its value from the start of 2014 to the end of 2016. 

However, once these factors assuaged (particularly the foreign exchange situation), analysts witnessed a market rally of 42% in 2017. Analysts believe this offers lessons for the current market dynamics as the bearish near-term outlook is hinged on pre-election uncertainty whilst market and economic fundamentals continue to improve. Thus, their longer-term outlook for the market is positive, and analysts see Nigerian equities as a relatively cheap long-term bet for patient investors.

Outlook revised lower on election effects 

Analyst’s outlook for 2018 is revised lower given the weight of the impending elections on market activities so far, a trend they expect to persist through the year. Furthermore, they note that developments in the political landscape would likely sway markets through the year; in particular, signs of heightened insecurity would depress investor sentiment whilst a strong likelihood of an incumbent victory (indicating continuity) would most likely reduce uncertainty. 

Analysts foresee the pre-election narrative superseding other positive market drivers such as global oil prices and macroeconomic performance. Meanwhile, they expect foreign sentiment to be more affected by pre-election activities, with domestic investor activity propped by increased PFA equity play. 

Across sectors, they expect the top tier banking sector to be less impacted and expect the sector to slightly outperform the market. Overall, analysts project a market return ranging between -5% and +5% for 2018, down from their +15% to +20% expectation at the start of the year. 

10 High Conviction Stocks 

Coming off an impressive 2017 – where the Nigerian equity market returned 42% – market performance has been unimpressive in the first half of the year, notching a slight ytd decline of 0.24% as at 21st June. Whilst strong oil prices, improving macroeconomic variables, and stronger corporate earnings ought to buoy market performance, pre-election jitters and a heightened insecurity risk are likely to weigh on the Nigerian equity market. 

As such, analysts are cautious on overall market performance for the year and forecast market return between -5% and +5% for 2018, down from their +10% expectation at the start of the year. Notably, the NSE remains undervalued compared to global peers. 

Particularly, the Nigerian equity market trades at a P/E ratio of 11.0x - below the MSCI Frontier Market index of 12.3x and also lagging other comparable indices such as MSCI BRICS (14.9x) and South Africa’s JSE (14.1x). Whilst analysts expect the political uncertainties ahead of the 2019 elections to overshadow the value in the market, analysts remain positive about the medium to long term outlook of the equity market and see the market as a long-term BUY. 

Analysts revisit their top “10 High Conviction Stocks” presented at the beginning of the year, which represents key stocks on the NSE that they expect to outperform the market at the end of the year. The selection covers stocks that offer the strongest potential risk-adjusted returns for 2018 and also includes a few that also provide defensive play for portfolios given their limited downside risk. 

They maintain their confidence in Tier II banking names and expect them to outperform their larger rivals in 2018 as the continued economic recovery continues to support earnings – though Tier I banks will retain investor interest due to their premium status and lower risk. Also, strong and rising oil prices and healthy production volumes are set to support the upstream Oil & Gas sector. 

Though Consumer Goods stocks should underperform in comparison to other key sectors and the wider market, analysts expect a few Consumer names to retain their structural P/E premium to the market. They note that these high conviction stocks have so far outperformed the broad market index by 1.5% on a market cap-weighted basis and 7.0% in simple average returns, and maintain these stocks as key picks for 2018.

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Wednesday, 27 June 2018, in Lagos, Nigeria.