Investors are bullish that the second half of this year will be more rewarding as the stock rally occasioned by the President Bola Tinubu’s economic reforms is expected to persist.
For equities investors, a return of 22.81 percent year-to-date at the beginning of this week surpassed June inflation rate at 22.79 percent.
Having embarked on a cautious journey in the first half that still yielded positive returns, the continued implementation of market-friendly measures and ongoing economic reforms make investors see more rewarding second half of 2023.
In the first six months of this year, Nigerian equities’ value increased by N5.3 trillion, thanks to oil and gas, banking, consumer goods, and insurance stocks.
For this second half, investors are expected to continue to take strategic positions, especially in sectors that are poised to benefit from the recent reforms (financial services, oil and gas and agriculture). Also, companies that generate revenue in foreign currency are also good BUY, according to market analysts.
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The Tajudeen Ibrahim-led research analysts at Chapel Hill Denham reiterate that buying equities remains compelling this year, “with the banks offering the strongest upsides”. “Other compelling names are the telecoms, MTNN and Airtel and Seplat in the oil and gas space,” they said.
While many analysts favour banking, oil and gas, agriculture and industrial goods stocks, they also opined that opportunities abound for tickers that have decent dividend payment history. This, for them, is one of the factors alongside solid corporate earnings and attractive valuation that make for the best proposition in the second half.
Also, analysts at Lagos-based Cordros Capital noted that “given that the second half of the year is typically associated with the declaration of interim dividends, we envisage that investors will be looking to generate alpha and will flock into stocks with attractive upside potentials, especially as we envisage a better earnings performance from second-quarter 2023”.
Specifically, Cordros Capital analysts expect an improved performance from the companies in the industrial goods and consumer goods sectors (particularly the brewers) and expect the banking, agriculture and telecommunications sectors to remain resilient.
“For the oil and gas sector, as earlier stated, we believe the removal of the regulatory cap on PMS prices will be a positive marker for the earnings of players in this space, particularly the downstream operators. Overall, we believe any dividend rush will favour early-bird investors,” they added.
Also, research analysts at ARM Securities, in a report titled ‘A bright spot in sight?’, said: “Authorities appear to have brewed strong optimism among players in the equities market. Thus, we expect the following factors to influence market direction in H2:2023: corporate earnings performance, fixed income yields direction, external conditions, hunt for dividend, exchange rate directions, and government policies.
Research analysts at Lagos-based Coronation, who in their recent note see investment opportunities from FX liberalization, said: “We have seen two major policy changes that are of enormous value to Nigerian investors. One is the removal of fuel subsidies, the other is the liberalisation of the foreign exchange regime with the aim of unifying naira/US$ exchange rates. These present excellent opportunities.”
They added: “We learn lessons from 2017 but also see key difference. We recommend buying the equity market, going by what happened in 2017 when FX rates converged, and in particular we recall what happened to bank stocks. In 2017, bank stocks outperformed, with the sub-index of banks rallying by 72.4percent compared with the overall market’s 42.3 percent gain.
“We expect bank stocks to outperform again this year. They tend to have net long positions in US dollars and therefore benefit from revaluation gains. The prospect of less onerous banking regulation (less onerous than the current cash reserve requirement of 32.5percent, for example) suggests they will have more liquidity than before.
“They are already reaping gains from a small but significant reform to the inter-bank lending market. Specifically, we think they will benefit directly from liberalisation of the foreign exchange market. The NGX All-Share Index has now recorded gains in each of 2020, 2021 and 2022, with the likelihood of 2023 bringing a fourth consecutive year of positive performance.”
According to them, pension funds are expected to revise their strategies. “Anomalously, Nigerian pension funds hold historically low allocations to equities while mark-to-market returns on equities are consistently beating mark-to-market returns on bonds. We think that pension funds are set to revise their strategies and re-weight to equities. Given their combined asset size of N15.6 trillion, this implies considerable support for the equity market,” they said.
Coronation analysts expect to see an increase in foreign participation in the second half but not on previous scales. “This leaves a question over the foreign portfolio investor. Will foreign portfolio investment become a significant factor in Nigerian capital markets again?”
They said: “For equities, we recall that foreign investors did participate in the rally of 2017 but that the following two years 2018 and 2019 were disappointing as the market fell, and there were issues with repatriation of dividends and investment proceeds in 2020.
“We think that there will be an increase in foreign participation in the equity market in 2023, but not on the scale seen in previous years. For naira-denominated fixed income markets, the participation of foreign investors will largely depend on the strategy of this administration for market interest rates, and there is no definitive guidance on these yet, in our view.”
The Coronation analysts said despite uncertainties in some areas, the overall reforming zeal of this administration has caught the markets’ imagination. “We expect this year to be a very rewarding one for Nigerian investors.”
In their second-half outlook, Meristem research analysts said: “Given the optimism around the ongoing macroeconomic reforms and anticipated improvement in the country’s macroeconomic condition, we expect investors to continue to take position strategically, especially in sectors that are poised to benefit from the changes (financial services, oil and gas and agriculture).”
They said: “We expect the pro-growth stance of the new government to increase investors’ confidence and private investment across sectors. Thus, we expect more companies to explore equity capital raise to appropriately position for market opportunities. Furthermore, we recognise likely corporate actions such as recapitalization of some banks.
“Another factor underpinning this is the deliberate efforts by the NGX to increase participation on the exchange through incentivising the use of the bigtech and fintech boards. The unification of the exchange rate is a potential solution to one of the most pressing FPI concerns in the Nigerian economy – repatriation of funds. With this and other macroeconomic reforms, we anticipate a gradual return of FPI into the equities market in the coming months.”
They noted that the recent rally in stock prices has led many tickers to their multi-year highs.
“Also in our view, most tickers in oil and gas and financial services sectors have found new support levels and trading range. Thus, while the Nigerian equities market trades at a premium relative to peers, we do not expect significant sell-offs based on elevated valuations. On a balance of factors, our prognosis is that the market will remain largely positive, we also expect investors to continue reacting to key policy changes implemented by the new administration,” they said.
ARM Securities analysts said: “In H2:2023, we opine that a fiscal revamp and pro-business policies, as well as increased foreign investor participation would support a positive equity performance. We believe that the direction of fixed income yields would continue to play a significant role in the direction of the Nigerian stock market given the liquidity awash in the market, following CRR debit refunds and seeing as we expect an influx of a Eurobond maturity of $500 million and domestic debt maturities of N2.29 trillion in H2:2023.
“This would likely lead to lower yields leading retail and institutional investors alike to increase allocation into equities in H2:2023 for diversification. In the same breadth, we expect to see some market driven events fueling demand which inadvertently could make way for speculative long interest in some tickers believed to outperform. However, we maintain our view that the logical flow for investments now is in value tickers with good fundamental backings. Our sector recommendations include the banking, oil and gas, and industrial goods.”
