Things are not looking up for the Nigerian equities market according to analysts at Afrinvest, Lagos-based investment banking firm, who said that prospects for the much anticipated stock market rally in the second half of 2019 have become bleak.
The equities market finished the first six months of 2019 with its worst first-half performance in 5 years on the heels of diminished growth opportunities for Nigerian companies, and the analysts say calling the market in rest of 2019 is a herculean task.
“Our perspective is that short term investors have no business with equities in the second half of 2019,”Afrinvest said in its Nigerian Economy and Financial Market outlook report titled “Next Wave of Inertia?…Better Safe than Sorry”
The investment bank, however, noted that weak sentiment prevalent in the market presents enormous arbitraging opportunities for technical traders to cash in on.
Hawkish central banks in developed markets, lingering infrastructure woes, policy drags, and elevated political risks ahead of the 2019 general elections affected the equities market in 2018 and pushed prices to attractive levels as trading opened for 2019.
Consequently, investors positioned in fundamentally cheap stocks and drove market performance pre-election out of doldrums to positive regions.
Following the conclusion of the general elections held in February, the market has failed to see much-anticipated recovery although there have been moments of brilliance in the market. Notable among which is the listing by the introduction of Telecommunication giant, MTN Nigeria.
As a result of dampened sentiments, many stocks have established new lows and are currently priced less than they are intrinsically worth, but analysts at Afrinvest fear investors are still in search of growth triggers.
“It is not enough for a basket of equities to be cheap; what guarantees capital appreciation that meets investors’ horizon?” the report notes. The analysts say current market pricing dynamics are likely to remain the same as the country’s risk continues to elevate compared to emerging peers given its structural lapses.
Meanwhile, high yield environment would continue to see foreign portfolio investors rotate to short term fixed income assets.
Company earnings are not expected to improve in the second half of the year, and Earnings Per Share (EPS) growth has been revised to 5 percent while Price to Earnings (P/E) is expected to average 7.5x with a maximum and minimum levels of 6.5x and 8.5x respectively.
The implication is that given the median P/E estimate, the market is expected to close at a year’s return of -1.9 percent. The market as of Friday last week was down 6.87 percent.
For the global and domestic economy, the report considered that the International Monetary Fund had in April revised downwards global growth to 3.3 percent from 3.5 percent in January 2019 and 3.6 percent from a year ago, owing to the effects of the US-China trade war.
Analysts at Afrinvest expect Brent prices to still go higher despite moderating from a Year to Date high of US$74.9/bbl as at April 24 to US$65.2/bbl as at July 2, while they noted US Federal Reserve’s signalling no rate hike in 2019.
A jobless growth of 2.5 percent is expected for Nigeria’s economy, by the investment bank, below its population growth rate of 2.7 percent.
The country’s current account balance is anticipated to be pressured as imports expands at a decreasing rate but faster than exports while Monetary Policy Rate is being expected to be stable and inflation forecast of 11.3 percent in 2019 was maintained.
Nigeria’s signing of the Free African Continental Free Trade Area (AfCFTA) would sustain Nigeria’s trade within Africa. Afrinvest notes that there is still a lot of work to be done around the standards and processes of the agreement.
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