Investors in Nigerian stocks paid seven times for each naira earning of listed companies three months ago, but with the lacklustre performance of the domestic bourse, stockholders are currently pricing naira stocks cheaper for each naira earning.
Confidence in the Nigerian market has waned on the limited growth prospects of companies amid a lack of clarity in the polity environment and weak macro fundamentals, all of which investors are pricing in their valuation.
Price-to-earnings ratio, which indicates the naira amount investors expect to invest in a company to receive one naira of its income, has declined by 6 basis points from 7.5 three months ago. It stood at 6.9 times on Monday.
“It is a reflection that investors have a weak appetite for Nigerian stocks,” said Gbolahan Ologunro, equity analyst at Lagos-based CSL Stockbrokers Ltd. “Investors are not seeing expected reforms especially from fiscal authorities.”
Meanwhile, most stocks across emerging markets have seen a decline in their price to earnings valuation since April. However, at Monday valuation, Nigerian stocks remained undervalued; trading much lower compared to emerging and frontier markets which are trading at 13 times and 12.4 times their earnings, respectively.
In context, investors are willing to pay 18 times for one rand of South African stocks, 15 times for Egyptian stocks, 12 times for Kenyan stocks, 14 times for Chinese stocks and 15 times for Indian stocks.
Analysts say while other emerging markets (EMs) have benefited from policy normalization in advanced markets evidenced by their positive gains year-to-date, Nigerian stocks are down on the absence of bold policy pronouncement to revive the market.
“Despite the trade tensions, some stocks in the emerging markets space are doing well, just that Nigeria is an outlier,” Ologunro said.
Emerging market stocks are up 9.5 percent this year, according to figures compiled from Morgan Stanley Capital International (MSCI) emerging market index, which tracks stock performance in the EMs.
While stocks in South Africa, Kenya and Egypt have gained 10 percent, 7 percent and 5 percent respectively, equities in Africa’s biggest economy have tanked 11 percent this year.
The most liquid and capitalized stocks which account for over 90 percent of market value, tracked by NSE 30 index, have taken a beating and are down 19 percent since the start of the year. In comparison, the broad market has lost 11 percent after a bearish performance Monday.
The inability of President Muhammadu Buhari to constitute cabinet almost two months after being sworn in for a final four-year term is also weighing on the country’s stock market and has made investors develop some forms of scepticism towards the domestic bourse.
Investors wished the former military leader emulate his Senegal and South African counterparts – Sackey Mall and Cyril Ramaphosa, who immediately hit the ground running by naming ministers within days of being sworn into office.
Analysts at Lagos-based investment house, Afrinvest Securities, expect the bearish performance at the Nigerian Stock Exchange to be sustained despite attractive prices in fundamentally sound stocks, even as half-year earnings result will do little to spur investor interests.
Israel Odubola & Segun Adams
