Hazy economy keeps investors bet away from Nigerian equities

The Nigerian economy is still hazy and investors remain uncertain where it is heading and this has continued to reflect on the numbers at the Nigeria Stock Exchange (NSE) where investors bet on listed stocks are being reduced.

Though the current market situation occasioned by sell-offs portends attractive re-entry point for bargain hunters, investor chose the cautious walk at the buy-side on the ever busy Customs Street, Lagos.   

The value of listed Nigerian equities, tracked by the market capitalisation, declined from record highs of N11.237 trillion as at January 5, 2015 to N9.495trillion as at last Friday, indicating a value loss of about N1.74trillion hanging on the necks of stock holders.

Year-to-Date (Ytd) returns from the Nigerian equities market have lowered in excess of minus 19 percent –making the market one of the worst performers when compared with other global markets.

“Given our expectations of weak investor sentiments, owing to the still fragile state of the economy, we do not anticipate significant positive trading activities in the coming weeks”, said research analysts at Lagos-based Meristem Securities.

The Nigerian Stock Exchange (NSE) All Share Index (ASI) retreated from a high of 33,943.29 points as at January 5, 2015 to 27,617.45 points recorded Friday November 27, 2015.

“This, in our opinion, suggests that the key market players remain unconvinced about the strength of the domestic macro-fundamentals at this time,” said research analysts at Lagos-based investment house, United Capital plc.

Data at the Nigerian Stock Exchange (NSE) shows that monthly foreign portfolio investment (FPI) transactions at the nation’s bourse decreased to N69.33 billion (about $0.35 billion) in September 2015 from N81.13 billion (about $0.41 billion) at the end of August 2015; representing a decrease of 14.54%.

“With Q3-15 GDP coming in at a disappointing 2.8%, it appears hazy near term growth prospects are driving a wait-and-see investor approach, with play now tilting more towards the less risky FI market. That said, we see tactical opportunities towards the end of the year and we think equities at current levels is ripe for position taking.

“We expect the market to close slightly higher this week as investors resume speculative positioning at bargain prices”, United Capital analysts added.

Nigeria’s Monetary Policy Committee (MPC) met on November 23rd and 24th, 2015 to review domestic and international economic conditions, in order to determine the policy direction for the next two months.

Consequently, the Committee decision which was in line with our expectation is as follows: The Monetary Policy Rate (MPR) was reduced from 13 percent to 11 percent; the Cash Reserve Ratio (CRR) was reduced to 20 percent from 25 percent; while the corridor around the MPR was changed from symmetric +/- 200 basis points to asymmetric corridor of +200/-700 basis points.

“The equities market will continue to react to the impact of the easing stance by the MPC, more on the positive. However, we advise investors to trade with caution and take position in value stocks with upside potential based on attractive valuation”, United Capital analyst added.

Also, research analysts at another Lagos-based investment house, Afrinvest, said in their recent equity note that the Nigerian equities market is in free fall.

“As the market continues to trend southwards in the absence of any news flow to sway investor sentiment to the positive horizon, we imagine any gains recorded in the market to be driven by bargain-hunting. Hence we maintain our medium to long term view for investment decisions”, Afrinvest analysts added.

“A number of frontier funds are now telling us that stocks look expensive. We accept that today, there is no immediate sign of Nigerian authorities being prepared to accept the need for a weaker currency – so we should assume continued declines in per capita GDP.

“The statistics office just released data showing that Nigerian unemployment jumped from 8.2% in 2Q15 to 9.9% in 3Q15 – due in part to massive 2m (2.5%) rise quarter-on-quarter (QoQ) in the labour force. The working age population is rising faster than GDP.  Conclusion from our marketing is that Morocco – with a cheap currency and a big underweight for Frontier funds – could be attractive relative to other African equity markets”, said to Charles Robertson, Global Chief Economist and head of Renaissance Capital’s macro-strategy unit.

As at September 2015, domestic investors conceded about 6.72% of trading to foreign investors, compared to the 11.38% they conceded in the previous month, as domestic transactions increased from 44.31% to 46.64% while FPI transactions decreased from 55.69% to 53.36% over the same period.

Foreign portfolio investors’ inflows accounted for 22.52% of total transactions, while the outflows accounted for 30.84% of the total transactions in September 2015.

Iheanyi Nwachukwu