Future of the equities market

The equities market has defied expectations of positive returns in the first quarter with the index losing 1.83 percent and 2.5 percent and 3.47 percent in January, February and March, respectively. The dominance of sell pressures amid pockets of marginal gains in the quarter was prompted by negative impacts of policy pronouncements from global and domestic regulatory space. While the stock market has taken a plunge having lost 7.25 percent YtD, bond yields maintained a band of 12.9 percent to 14 percent.

MPR, reserve and import cover: Playing the scenarios

The last MPC meeting was concluded with a decision to keep the MPR at 12 percent ±200bps. While we think the final policy decision of the MPC to the current reality is a little contrasting to their meeting deliberation, we review the past communiqué of the MPC in a bid to play a scenario on the possible direction of the MPR, reserves position and attendant impact on market expectation going forward.

Going back in time, the MPC in its October 2011 meeting, amid declining oil prices and foreign reserves, increased FX demand, fiscal dominance and capital flow reversals raised MPR from 9.25 percent to 12 percent by a vote of 8 to 1. CBN data suggest that the reserves has been declining consistently on a daily basis by an average of 0.3 percent (- 13.38% YtD).

On the assumption that the reserves will continue to tumble if capital reversal persists at the current rate, our projection indicates that by June 2014, the reserve position may average $30.834 billion. This number corresponds to about six months of import cover (vs. eight months currently). Consequent on this, the monetary authority may be left with few policy options but to raise the MPR as was the case in October 2011, in the face of analogous event.

Nigerian equities market currently defying expectations

Contrary to the mildly bullish expectations for the Nigerian equities market in H1:2014, 2014 so far has been marked by negative sentiments resulting in the 7.25 percent loss to date. Investors exhibited little, and in most cases no reaction to strong 2013FY earnings releases, corporate declarations and attractive dividend yields, particularly on financial services stocks.

Nigerian markets remain an attractive destination for FPI

Despite the influx of negative news and the attendant impact on trading decisions, the market remains attractive compared with peers in the African equities basket; Nigerian P/E (13.62x) remains the cheapest in the basket save for Botswana that has a P/E of 9.9x. Return on Equity for the Nigerian stock market at 19.14 percent is also remains the second highest amongst its peers, trailing only Botswana (26.47%) and thus further buttresses the attractiveness of the local bourse.

 Conclusion

Given the breather in regulatory headwinds following the policy pronouncement of MPC during the week, we are of the view that the financial market (particularly equities) may begin to swing within the positive direction. While the QE tapering and the general negative sentiments in our view are still prevalent, we are believers of the positive upturning impact of compelling attractiveness of equities (given their current low levels) and pockets of striking corporate actions.

We therefore expect the market to begin to gyrate within the positive territory in the near term while we stake that at current market valuation (P/E 13.62x), the bottom of the bearish swing may be near or perhaps over.

 Iheanyi Nwachukwu