Stock market to witness further sell-off as investor concerns persist

The Nigerian equities market may witness further sell-off this week as there is little to changes relating to investors earlier worries that caused them to look away from the stock market.

Recent decline in oil price has triggered equity investors worry about the health of Nigerian oil dependent economy – with most of them asking whether it is safe to bet in Nigerian equities.

The message remains that most stocks today at the secondary market are trading at discounted rates, indicating good entry points for investors seeking capital appreciation at the medium-to-long-term when economy stabilises.

Many investors await the release of companies full-year financials for 2014, with possible corporate declarations (like dividends and bonuses) – a development that should strengthen the demand side at the stock market.

Contrary to this norm, investors have been conservative in their decision in favour of Nigerian equities due to their worries over the outcome of forth-coming general elections.

The Nigerian stock market was down by 16.22 percent in year-to-date (ytd) performance as of last week. Week-on-week (WoW), the Nigerian Stock Exchange (NSE) All-Share Index (ASI) and market capitalisation depreciated by 3.68 percent and 3.09 percent, respectively, to close last Friday at 29,034.89 and N9.671trillion, respectively.

Stock market witnessed huge supply pressure that helped to push market benchmark performance indicators further south.

Read also: Bargain hunting, selloffs trail equities as investors pitch for profits

Fifteen equities appreciated in price last week, higher than 14 equities of the preceding week. Fifty-three equities depreciated in price, lower than 55 equities of the preceding week, while 127 equities prices remained unchanged same as recorded in the preceding week.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) held its two-day meeting last Monday and Tuesday, January 19 – 20, 2015, without earth moving decisions in line with analysts’ expectations.

“We expect the market to continue on current trend as investors dump their shares and exit the stock market over concerns about the health of the economy and worries about forth-coming elections,” said market analysts at Access Bank plc.

“This week, we expect the negative sentiment in the market to persist and see the market closing the week negative. The market is expected to be quiet in the first two trading days on the back of expectation from the MPC meeting,” said investment analysts at Lagos-based United Capital plc.

Research analysts at Meristem Securities Limited said: “We anticipate that declining demand (especially from foreign investors) may continue, taking into cognisance the sliding global oil prices, the impending February 14 general elections, as well as the market’s expectations of outcome of the MPC meeting this coming week.”

Analysts had noted that with the dynamic macroeconomic conditions seen towards the end of 2014, essentially new oil supply dynamics that crashed the price of oil by 58.1 percent, the 8.4 percent official devaluation of the naira, and the widening spread between the naira/US$ rate in the interbank and official windows, the equities market was pulled downwards as negative foreign investor sentiment led to significant outflows from the market.

“Despite the late December rally in the equity market, we expect this asset class to perform negatively in Q1’15, as lingering macroeconomic and political uncertainties sustain investors’ apathy. However, we envisage an improvement in market sentiments and activities from late H1. Our base case scenario sees the NSE All Share Index reaching 39,432 points, a 13.8 percent return in the course of H2 2015,” said investment analysts at CardinalStone Partners.

“Our outlook on equities therefore considers key global and domestic factors which we envisage will dictate the direction of the equities market in 2015. We considered the likelihood of each factor and analysed the effect on the equities market. Hence, to quantify our expected return on the market, we use the Grinold-Kroner model which is based on expected fundamentals in the market, including forecasted earnings growth, expected inflation, and predicted dividend yield. From this, we project a base case return of 13.8 percent for broad market index in 2015,” the analysts said.

Recent events in Nigeria’s political landscape have heightened the uncertainty around presidential elections in 2015, in addition to decline in price of oil (a major source of revenue for oil dependent economy like Nigeria), have continued to affect investors’ decision to add Nigerian assets into their portfolio.

“With oil contributing about 70 percent of Nigeria’s revenue, the drastic drop in oil price will significantly curtail government revenue and invariably expenditure,” the analysts at CardinalStone said in their 2015 outlook titled “caution through the tunnel.”