09 August 2018 : With the latest havoc being brought upon by the civil servants, late passage of bill, inertia on the 2019 Budget, the ministers walking out on APC to join the opposition, all this has contributed a great deal of political uncertainty in the country, which is osmosing into the equity sector. Consequently, the sell-off pressure in the market is rising like smoke from a generator on fire. Another after-math of this insecurity is that investors are holding off on investments till after the 2019 elections, which obviously hinders the economic growth and development on the country. Its all just one vicious cycle.
Now, lets talk about the effect on benchmark NSE 30 index, the index that captures 96% of the market’s capitalization. This pressure, has left the P/E ( price to earnings ration ) of this index the lowest since 2009, which is almost a decade. This ratio is crucial is deciding whether a stock is under-valued or over-valued. In 2009, the P/E was on a roll and skyrocketed to an all time of 21.68x.
The Full year ( FY ) ratio went something like this:
- 2010 = 13.94x
- 2011 =18.18x
- 2012 =11.58x
- 2013. =14.51x
- 2014. =11.84x
- 2015. =11.46x
- 2016 =12.47x
- 2017 =10.67x
- 2018 =9.01x
Hence, we can see that not only did it drop to its lowest, it also followed a sin x curve throughout the decade. Mispricing could be a beautiful bargain and will encourage investors to buy before the market rectifies it. The ratio is expected to go down further as the stock are plummeting courtesy the enormous sell-off pressure.
Some companies have seen growth in their earnings as share prices fell further compressing valuations. This growth in earnings can be attributed to the introduction of the I&E policy last year, along with the relative calm in Niger Delta region and of course the oil rally.
The NSE 30 index reports a YTD loss of 6.47%, in comparison to the the 5.08% YTD loss in the all share index.
If we decode the segments, the P/E ratio for the banking 10 index fell from 7.15 in 2017 to a current ratio of 5.36 and the P/E estimate for 2019 is 4.37x.
Lenders boasted a growth in earnings from 2015 to 2017, due to the devaluation of Naira and the high interest rate environment.For the year ending dec’17, the lenders witnessed a surge in tax profit from N 478.1 billion to N 693.9 billion, which is a whopping 44.28 % increase.
However, the precipitous drop in yields on short-term securities will squeeze future margins which then has the potential to scare-off the bulls.
A low P/E ratio means that it is time to buy, Specifically when Bank earnings are under pressure fueled by the low interest rate environment.
The consumer goods earnings pace has slowed down majorly because there is a tremendous pressure on the consumer’s wallets. Consequently the P/E ratio of the Consumer Goods 15 Index dropped from 27.87 in 2017 to a current value of 19.80, while the 2019 estimate stands is more bearish and stands at 15.98, majorly because the elections are known to trigger inflation which will put further pressure on the consumers wallets and in turn the sector’s earnings.
Lastly, the P/E ratio of the oil and gas sector currently stands at 4.17 x in comparison to a value of 12.18 x in 2017.
Reporting for EasyKobo on Thursday ,09 August 2018 in Lagos, Nigeria