Analysts are predicting cautious optimism for Nigeria’s stock market in the second quarter after a turbo-charged Q1 that ended after bank stocks fell and interest rates on fixed income securities surged.
Early stock market gains fueled by year-end sentiments and full-year earnings have been eroded by rising interest rates and concerns around the banking recapitalisation.
Nathanael Disu, an investment research analyst at Afrinvest Consulting, said that expectation for the equities market going forward in the second quarter was one of cautious optimism.
“We saw how the Q1 frenzy went, largely due to rollover bullish sentiments of last year, anticipation of full earnings release and some strategic investors positioning in some equities,” he said.
However, Disu said that those gains have been eroded by change of investors’ appetite on the back of CBN raising MPR by 600 basis points (bps) to 24.75 percent which has seen fixed income securities like Treasury Bills become attractive to investors.
The year-to-date return of the stock market has dipped to 31.4 percent as at Thursday, May 9th, from 39.8 percent at the end of the first quarter.
“Also, the bank recapitalisation exercise by the CBN has seen the banking sector become bearish as investors are in a “wait and see” mode in the midst of heightened regulatory activities in the sector.,” Disu said.
The banking index has slipped to a year-to-date loss of 13.7 percent as at the end of April from a return of 14.8 percent in the first quarter.
The CBN restrained banks from paying dividends from proceeds of FX revaluation gains. “So, investors are seeing the solid numbers banks are declaring as profit after tax, but know they can’t benefit from it via dividends,” he said.
Analysts say the banking recapitalisation process raises possibilities of share dilution which would likely impact existing shareholders. The banks have announced plans to sell Rights Issues which could lead to share dilution.
The outcome of the next Monetary Policy Committee meeting, scheduled for this month, will likely shape investors’ perception as they reassess portfolios between equities and fixed income securities.
“In all, there’s a need for cautious optimism at this stage,” Disu said.
Another Lagos-based analyst said that the equities market is likely to face ongoing challenges in May due to the Central Bank of Nigeria’s (CBN) hawkish approach.
The CBN’s focus on tightening monetary policy, reflected in its move to raise interest rates, is anticipated to keep exerting pressure on equities.
“With higher fixed income yields, alternative investment options like equities appear less appealing, prompting investors to adjust their portfolios accordingly,” the analyst said.
The analyst said that as a result, the equities market may struggle to recover and could continue to experience bearish trends throughout the month.
After the 400 bps increase in MPR to 22.75 percent at its first meeting in 2024, yield on the risk free one year NT-bills has been soaring. It surged to 23.44 percent in February then grew to a high of 27.33 percent at the first auction in March.
At the second auction in March, yields were still at elevated levels of 26.76 percent and has since maintained this range till its most recent auction in April (26.1 percent) . This followed a 200 basis point hike in MPR to 24.75 percent.
“We expect the bearish sentiments amongst investors to persist in the local equities market given the recent developments in the fixed-income market. The impact of the high yields in the fixed-income market will continue to drive sell-offs as investors switch their asset classes to less risky assets,” United Capital research analysts said in a May 6 note to clients.
“However, we expect bargain hunting activities to lurk in the shadows, owing to the tremendous opportunities presented by the recent bearish trend (particularly around the banks),” the United Capital analysts said.
Similarly Mustapha Umaru, an equity research analyst at CSL Stockbrokers Limited said that the stock market will remain bearish unless new liquidity enters the market.
He said that most banks are currently trading below their share price.
“Also the new recapitalization will reduce their share price in the short term as they’ll be excess supply due to right issues or public offers. But investors will buy because banks are profitable,” he said.
For consumer goods sectors, Umaru said “our position is bearish as most companies are dealing with FX losses and might scare investors from positioning there.”
Nestle Nigeria Plc, International Breweries Plc, and Dangote Sugar Refinery Plc were among the top consumer firms that reported the highest foreign exchange loss in the first three months of 2024, according to BusinessDay’s analysis of their latest financial statements.
The near 30 percent devaluation of the naira this year hit the consumer firms hard.
Nestle posted an FX loss of N166.9 billion in Q1 from an FX gain of N390 million in the same period of last year followed by International Breweries with a loss of N162.2 billion from a gain of N1.22 billion.
The foreign exchange loss of Dangote Sugar Refinery widened to N102.9 billion from N4.38 billion while Nigerian Breweries Plc reported an FX loss of N72.85 billion, up from N14.64 billion and Dangote Cement Plc had N63.77 billion, up from N9.79 billion.
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