Equities show strength, attract premium on Buhari’s victory

Investors in the Nigerian stock market are showing a readiness to pay more for value equities at the Nigerian Stock Exchange (NSE) as Muhammadu Buhari’s victory last week at the presidential polls further brightens the country’s governance future.

Contrary to earlier expectations in the market of a wait-and-see pre-election scenario, the outcome of last week’s election enticed investors to raise bets on Nigeria equities, resulting in over N1.82trilion in  gains in just four trading days.

“We think investors may be willing now to pay a premium for Nigerian equities, given the expectation of a drastic improvement in economic and governance structure. We are positive on Nigerian equities in the medium term but we advise investors to trade with caution and play strictly on fundamentally viable names,”  said investment analysts at Lagos-based United Capital plc.

Amid the recent upside shown at the stock market, analysts optimism is that the market still has about 20% upside valuation before catching up with emerging and frontier market peers. Last week, equities routed positive by 3.09% -the first bound of that magnitutde since this year.

Before now, a mix of macro-economic concerns like crude oil price decline (which pressured foreign reserves with a dampening effect on naira exchange rate against the dollar), insecurity in the North Eastern region of the country, and earlier heightened political risks, helped in battering equities.

The dispersal of the negative political clouds and transition to a new government are expected to reduce the artificial demand for the greenback, as well as lead to a faster slope to a more market determined exchange rate.

Nigerian financial markets were flying on the election result and the conduct of the presidential election, driven by international investor buying sentiments which was concentrated on the larger banks.

“We think Buhari would likely be a reformist. In addition to a crackdown on corruption and more effective handling of the Boko Haram insurgency, we expect austere fiscal policy to be imposed. “Less corruption could lower the cost of doing business, particularly for small businesses, and a more secure Nigeria would allow isolated regions to re-engage with the rest of the economy,” according to Yvonne Mhango, analysts at Renaissance Capital.

The Gregory Kronsten led team of analysts at FBN Capital said “Nigerian financial markets were flying on the result and conduct of the presidential election. The NSEASI rose by 8.3% on that day, driven by international investor buying, which was concentrated on the larger banks.”

The analysts in their view tagged “the changing of the guard” noted that “the election only became an investor concern on its postponement, which created a number of negative scenarios for the offshore community. Once these proved unfounded, a strong rally was always likely.”

In the past seven years, domestic investors have relinquished 42.7% of stocks trading value to foreigners. Total foreign portfolio investment (FPI) transactions of N616bn which accounted for 14.8% of total transactions at the Nigerian Stock Exchange (NSE) in 2007 rose remarkably to N1.539trn at the end of 2014.

This level of FPI transactions represents 57.5% of total transactions in 2014, an increase of 42.7% over the 7 year period. The monthly FPI transactions at the nation’s bourse which was N99.11billion at the end of January 2015 increased to N133.95billion (about $0.68billion) at the end of February 2015, up 35.15% from January 2015. In two months, foreign investors have made about N32.3billion from  the Nigerian stock market, evidenced in a total foreign inflow of N100.38bn as against total foreign outflow of N132.68bn.

Iheanyi Nwachukwu