By Emeka Aaneto, Business Editor
WE are now concluding the series on second half 2018, H2’18, prognosis for equity investment decisions with the outlook on election year. The scenario analysis by analysts at Afrinvest West Africa which we published in this column last week was anchored on “positive outlook dampened by general elections concern”.
Today we present their conclusions headlined: “H2’18 Equities Market Prognosis …Cautious Trading Ahead General Election” as follows:
As noted in our Nigerian Economy and Financial Market 2017 review and 2018 Outlook report titled “the Virtuous Cycle…Again!”, we opined that as external factors, especially with regards to oil prices, which resulted in higher FX inflows into the market, remained upbeat, investor sentiment was expected to stay positive. We also noted that trading activities in 2018, although expected to be positive, will be largely hinged on investors taking position in fundamentally sound stocks as opposed to the prior year in which rallies were recorded across the market.
Whilst these factors remained positive in H1:2018, market performance was lacklustre as a result of sustained profit taking as well as capital flow reversals. Nevertheless, we review our earlier prognosis on the market vis-à-vis H1:2018 performance and our expectations for the second half of the year.
New Market Listing
In our earlier report, we noted that the prevailing market conditions at the time, were favourable for new as well as existing issuers to approach the market for new listings. This is also in line with regulators’ drive to further deepen the market via increased product offerings available to investors. In light of this, a major and potential driver of market performance in H2:2018, is the listing of the MTN Nigeria shares on the Nigerian Stock exchange.
MTN Nigeria (MTNN), a subsidiary of the South African company MTN Group, is the biggest telecommunications operator in Nigeria. Considering the size of the company, a significant jump is expected in the total market capitalisation of the Nigerian Stock exchange and given the pedigree and international recognition of the parent company, significant investor interest is expected to be generated by the stock following its listing.
Consequently, we believe the listing will further deepen the market as well as turn the spotlight on the local bourse given the expected investor interest from both domestic and foreign investors.
Furthermore, we believe the listing of MTN Nigeria on the domestic bourse could potentially encourage other “big companies” in Nigeria which are currently unlisted to approach the market with IPOs.
General Elections Uncertainties
In line with historical trend, investors tend to reduce exposure to risky assets in the year leading up to general elections and this is similar to the situation in Nigeria. The one thing investors detest is “uncertainty” and as such the policy uncertainty which is usually characteristic of a pre-election year, has continued to weigh on market sentiment. Investors will be keeping a keen eye on development in the polity with regards to either a change or continuation of the current administration and expected policies. As such, this downside risk is expected to worsen as 2019 general elections draw closer.
Whilst the delay in the passage of the 2018 budget could potentially have stalled some of the expected benefits associated with the budget implementation, we believe sufficient implementation will have a feedback positive impact on companies’ earnings as well as consumer spending. The Industrial Goods sector is expected to benefit the most, given the proportion of the budget allocated to capital spending, however, we note that historically the actual capital expenditure has consistently lagged the budgeted figures hence the impact on the sector could be limited.
Sustained Liquidity in the Forex Market
Since the launch of the Investors’ & Exporters’ Foreign Exchange (FX) window in April 2017, which resulted in increased foreign portfolio inflows into the domestic market, the CBN has been able to sustain liquidity via weekly retail and wholesale interventions.
In our earlier report, we noted that sustained liquidity in the FX market will be a key determinant of performance. However, whilst we note that FX liquidity in the market has remained somewhat adequate, the continued focus of the CBN on keeping rates within a particular band, has weighed on Investors’ confidence. Furthermore, the fact that the CBN remains the major supplier of FX to the market has also weighed on sentiment and this could continue to pressure foreign investor sentiment which will have a feedback negative impact on the equities market.
Pressure on Corporate Earnings
Even as improved macroeconomic conditions have largely resulted in improved performance of corporates, our outlook on earnings remains largely mixed across sectors. We are most optimistic on earnings of the Banks, especially the Tier-1 Banks, given the resilience demonstrated amidst tougher operating conditions.
Furthermore, interest income could potentially be boosted by increased, albeit cautious, credit extension whilst the banks also restructure existing loans, to reduce the impact of high NPLs on earnings. Similarly, we have a positive outlook on the Industrial Goods sector as manufacturer’s adjust prices upwards in order to make up for the shortfall from volume sales.
Also, the improving conditions in the economy could result in increased construction activities, especially considering the proposed capital expenditure in the 2018 budget (N2.9tn).
For the Consumer Goods corporates, despite the higher prices seen in the year, we expect earnings to remain pressured by lower volume growth. In addition, the sustained sell offs noticed in the sector in H1:2018 can be tied to market correction in terms of valuation of the sector relative to peers. Historically Nigerian Consumer goods stocks, have traded at a premium to peers but have undergone some correction following losses recorded in H1:2018 which moderated the valuation discrepancy. Price Earnings, P/E, multiples show that the Nigerian consumer goods companies currently trade at a discount to peers in other African markets – Nigeria (18.9x), South Africa (21.1x), Egypt (23.8x), Kenya (59.0x) and Ghana (87.2x).
In the Oil & Gas sector we expect a mixed performance between the upstream and downstream corporates. For upstream, we believe earnings will be boosted by higher oil prices as well as increased production volumes, however, earnings of downstream companies could be dragged by the sustained inaction with regards to the deregulation of the downstream sector.
In addition to the aforementioned factors, we believe trading activities in H2:2018 will be largely characterised by periods of bargain hunting as well as profit taking as investors focus on timing entry and exit of the market.