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Equities Outlook: Balance to still tilt in favour of bullish sentiments

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Factors to watch

By Emeka Anaeto, Business Editor

THOUGH equities closed a slip down at the Nigerian Stock Exchange last weekend, the overall market position indicated a re-emergence of bulls after the beers’ hit for three consecutive days previous week. Thus the Lagos bourse closed the week up with Year-to-Date, YtD, capital gains substantially surpassing previous weeks at 23.23 per cent, up from 19.5 per cent, due to the bull surge in the first two trading days post-holiday last week.

Stockbrokers had gone on the holiday with head-cracking permutations on what would happen at resumption on Wednesday following the 3-day beer run which was orchestrated by a few adverse developments in the some macroeconomic fronts.

The push, pull forces

Nigerian Stock Exchange

The key worries had centered on the sustained down-turn in the prices of oil in the international market which had meant a re-emergence of pressures on Nigeria’s oil-dependent economy. Remarkably, the down-turn hitting about $43 per barrel, became so threatening as it trended significantly below Nigeria’s 2017 budgeted oil price benchmark of $44.5 per barrel, meaning that a twin problem of fiscal funding restriction and foreign exchange shortages may be underway. The down-turn in oil prices was coming at the backdrop of a steady decline in the nation’s external reserves.

These twin adverse macroeconomic developments had dented the positive sentiment that had hovered over Nigeria’s economy in the past three months, rubbing off on the stock market and resulting in its longest rally in recent years.

However, the global oil market returned to the positive territory early last week when a sustained rally pulled overall prices up with Nigeria’s crude oil grade in the OPEC basket trending up beyond the 2017 budget benchmark during the holiday, just before the first trading day of last week.

The Nigerian Stock Exchange closed on that first trading day, Wednesday, with a 1.67% appreciation.

Despite last weekend’s slip back the market at, YtD of 23.3 per cent, at end of the first half of the year, is recording one of its best returns ever.

In this page last week, we gave an insight into why investors and stockbrokers were perplexed with the emergence of beers previous week. With the re-emergence of the bulls last week we take another look at the driving forces as follows:

Rebound in oil prices

As stated earlier, the international oil price outlook has suddenly turned positive. Not only are the prices trending upwards, some other indices appear to be favouring a sustained rally. They include a sustained OPEC production cut back initiative, the increasing prospect of demand outstripping supply, a decline in stocks of oil in the USA despite increased Shale output.

Added to these are some positive developments in and for Nigeria. Output is rising while OPEC has indicated it has no plan to reign in on Nigeria against the production cut back agreement. It is even believed that since a Nigerian, Mohammed Barkindo, is at the helm of affairs in OPEC, Nigeria would always have a favourable position in production allocations.

But many observers of the dynamics of the international oil market believe that both USA Shale producers and a few non-OPEC member producers may step up output once prices begin to close in on $50 per barrel, thereby forcing price drops.

FOREX Market

Perhaps one of the key drivers of bullish trading in equities in the past three months is the improved state of the foreign exchange market where the Central Bank of Nigeria, CBN, had ensured adequate supply in its, now very frequent and robust interventions in the market.

Even in the face of the threats of possible drop in foreign exchange inflow from the oil receipts due to adverse developments in the international oil market, the apex bank had sustained the position, giving the impression that it has the capacity to retain the stability already achieved.

This has buoyed foreign investments in the equities while giving investors the hope that quoted companies would turn in impressive results now their biggest challenge is removed.

Threat of MSCI

According to analysts at Nairametrics, a Lagos based financial information company, the market was also spooked previous week after a threat that Morgan Stanley Capital International (MSCI) index could downgrade Nigeria. However, the managers of the index decided to postpone its review till November 2017. The threat, if carried, out would have meant yanking Nigeria off the frontier market making it a stand-alone market. The implication of course would have been that the liquidity that will typically flow to this market will evade Nigeria, while the ones already in will fly away. Luckily, Nigeria lives to fight again.

Positive view of results

Rumours making around in the market suggest second quarter results (first half 2017) would even be better than the resilient performance recorded in the first quarter of 2017. If this rumour holds true then taking a bet on stocks now could well be rewarded bountifully in the next coming weeks. Investors who are positive on results are taking positions in time for another bull run. Like we mentioned in an earlier article, the market is currently trading at about 15x 2016 earnings. A positive outlook suggest prices are even cheaper despite the market gaining over 20% already.

Peace in the Niger Delta

Previous week investors were also spooked by a threat of the New Avengers (looks like an off shoot of the Niger Delta Avengers) that they were going to resume hostilities in the region. However, they changed their minds in another press release last week stating that they have decided to give peace a chance, to allow their local community leaders continue negotiations and achieve a peaceful resolution.

We believe all these and more would spell good omen for equities this week and indeed this month of results and earnings announcements.


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