Dolapo Ashiru, Head, Stockbroking, Lead Capital Plc, spoke on what should be expected in the equities market in the third quarter of the year.
By Nkiruka Nnorom
VERY soon quoted companies will start releasing their Q2 result, what do we expect in the results?
First of all, on the back of the fact that macro-economic indicators are looking good, it is obvious indication recession is gradually ebbing; we are obviously coming out of recession. The fact that inflation is falling, the fact that Purchasing Managers Index, PMI, has been above 50 per cent, the fact that foreign exchange liquidity is better now, we are expecting to see an improvement in companies result in Q2, which will cause a further rally in the market.
I am also expecting that by the time they announce the GDP for Q2, we should be out of recession. So, by the second half of the year, things will be better than the first half.
You know that the primary end of the market has been dormant over the years. With the recent rally, do you see companies coming back to the primary market to raise money?
Yes, a lot of companies have indicated that they are going to come back; some have already come back. This year, for example, we have seen two or three listings. We saw Medview Airline, we saw The Initiaves come out. We have seen Rights Issue from Livestock Feeds. We have also seen Rights Issue from UPDC Plc. Other companies have also announced that they are coming to raise money.
Forte Oil Plc has said that they are trying to raise N20 billion from the stock exchange, Lafarge Africa and Unilever Nigeria Plc have all announced that they want to come and raise money. So, that shows that activity is returning in the primary market, though most of them will like to opt for Rights Issue instead of public offer. So, we are going to see a lot of Rights Issue in the second part of the year.
Do you see people taking up the offer, especially for companies that may wish to do public offer?
Like I said, most of the companies are coming for Rights Issue. So, we will see more of Rights Issue than public offering. Any time from 2018, we will begin to see public offer, but majority of corporate issues in the market this year will be Right Issue not public offer.
How is confidence in the market? Are local investors really coming back or is it still institutional investors that are still investing?
There is confidence in the market, both from local and foreign portfolio investors. For example, two weeks ago, Morgan Stanley Capital International Frontier Index increased Nigeria weight for equities from 6.5 per cent to 7.9 per cent, which means that there is increased allocation on their index from Nigeria equities, which is one of the reasons why you see a lot of foreigners coming to buy Nigeria stocks.
So, for foreign investors, there is increased optimism from them on our market. For local investors, there has been a rally now. The market is at about 20 per cent confidence state now. Obviously, the market is doing well now; there is a lot of confidence in the market. And the performance of the market will be sustained as long as the Foreign Exchange windows are still there and there is flexibility in the FX market and the macro-economic indicators are still good, the rally will be sustainable this year.
You mentioned that Morgan Stanley increased weighting for Nigerian equities. What is the implication of that action?
There are some foreign portfolio investors that mirror that index. They align their portfolio with that index. So, if the index is increasing weighting to Nigeria equities, automatically the foreign investors will increase their stake in Nigeria because they mirror that index.
What sectors are most likely to be investors’ choice in the third quarter?
For banking stocks, the ones that are going to be investors’ choice are basically United Bank for Africa, UBA, GTBank, Zenith Bank Plc and Access Bank Plc. We call them first tier banks. For industrial goods, it is Dangote Cement and in the consumer goods, we will be looking at Nigerian Breweries Plc and Unilever Nigeria Plc. I mentioned the tier one banks because they are the biggest banks in Nigeria. If you are talking about tier one banks, they are the ones with very low Non-Performing Loan, NPL portfolio; they have been able to cut cost very well and they have been able to leverage online banking.
If you have noticed, most of the companies that have recorded impressive returns this quarter are low cap stocks. What do you say about this?
The problem with low cap companies is that they do not have much liquidity. They battle with liquidity problem in shares, but the banks I mentioned have very high liquidity. And these banks have capacity to absorb any shock. If the economy should turn around, they have the capacity to absorb the shock.