BY NKIRUKA NNOROM

A financial expert and investment analyst, Mr Bismark Rewane, has expressed optimism that the current rally in the equity segment of the stock market will be sustained. Bismark who made the assertion in his bi-monthly review of the economy, said that strong macroeconomic fundamentals and attractive valuations favour the surge.

Additionally, he noted that liquidity being injected into the market, as well as robust financial positions of many Nigeria companies would combine to make the rally more sustainable.

The Nigerian Stock Exchange (NSE)’s market capitalization, which has been hovering around N6 trillion in the last one year recently climbed to over N7 trillion marks, while the All Share Index, ASI, has moved to 22,000 basis points.

Specifically, at the end of transactions on Monday, 21 may, 2012, the market capitalization stood at N7.115 trillion, while the ASI rose to 22,309.62 points.

Breakdown of analysis contained in the review, a copy of which was obtained by Vanguard, indicated that the NSE gained nearly 7 per cent in April after a negative performance of 0.38 per cent in the first quarter. “The up-trend has continued in May with a 2.30 per cent gain thus far in the month; leading to the NSE catching up with global equity return for the year with a return of 8.79 per cent.

“Comparatively, the recent surge in the market, places the stock exchange amongst the best in terms of returns globally. Currently, the ASI is the third best performing index in Africa, behind Egypt (38.44 per cent) and Kenya (12.30 per cent),” he posited.

The Financial Derivatives company (FDC)’s boss further argued that these fundamentals are impacting on investors’ sentiment and risk appetite.

Rewane said, “Many are surprised by the recent surge in the stock market and question its sustainability. We believe it is not only sustainable but will accentuate. Stock market history confirms that equity valuations are a slave of earnings, and the history of corporate earnings has shown that they are a derivative of the underlying economic environment.

To some extent, this year’s torrid advance is simply the NSE playing catch-up. The index went nowhere last year despite solid profit gains by listed companies. The one year average earnings per share growth for the top ten most capitalized company is 13.45 per cent compared with an index return of -9.39 per cent over the same period.”

“All indicators show that stocks are extremely undervalued on the NSE. Banking stocks are trading at historical low prices with most banks trading at a Price-to-Book value (P/BV) of less than 1. Equity valuations on many measures remain very cheap. The price/earnings ratio for the NSE stands at 7.10, very low compared to historical values and lower in comparison to other frontier markets such as Ghana and Kenya,” he added.

He remarked that the impending interest rate reversal in fixed income market attract portfolio rebalancing in favour of equities.

“It is true that fixed income has been the favoured investment option during the past year. Now we are seeing a revival in investor interest in equity which we expect to continue. The main asset class on the NSE remains equities by virtue of the large number of listed stocks. Certainly fixed income is attractive and is growing in importance; however, impending interest rate reversal will make portfolio rebalancing in favour of equities inevitable,” he sated.