• Wednesday, February 28, 2024
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Stock rally fades as overpriced equities prompt sell-off


The rally in Nigerian equities that lasted till the middle of the year has all but faded as expensive valuations and negative sentiments help to prompt a sell-off amid looming elections, an Ebola outbreak and the deteriorating security situation.

The NSE – ASI closed at 41,017.49 points last Friday (September 09) as market capitalisation declined to N13.54 trillion.

Stocks are down 0.75 percent year to date, bucking a bull run experienced by global indices in August.

“In August the market saw the early signs of a correction as corporate earnings could not justify elevated stock prices,” said Bismarck Rewane, MD/CEO Financial Derivatives Company Ltd in a September 3 presentation.

“Stocks with high valuations that are liquid have become sell-off targets. With earnings multiple of 29.86x, down from 30.34x, the correction still has some way to go.”

The average daily turnover for equities has declined by 40 percent to N3.23 billion from N5.34 billion in August.

The earnings multiple in the S & P 500 is 18.03x, while the MSCI Frontier markets index has an earnings multiple of 16.7x . 

Analysts say portfolio rotation and reshuffling have commenced as institutional investors, mainly the PFAs remain underinvested in equities.

The share of equities in PFA portfolio is capped at 25 percent by the regulator PENCOM, while they are allowed to hold up to 70 percent in government fixed income securities.

Latest data from PENCOM show PFAs are underweight equities with only 14.43 percent of assets allocated to stocks as at June 2014.

Headwinds for stocks include the approaching 2015 general elections due in five months, as well as an Ebola outbreak that has caused a slowdown in the services sector (Hotels and Airlines) in Lagos, Nigeria’s commercial capital.

“We believe the extensive negative sentiment in the market, especially in the second half of this year, may be driven by investors’ perception of the Nigerian economy and  financial markets in the run up to the 2015 elections,” said Meristem Securities analysts in a note released August 27.

Investor sentiment post the release of first half earnings was largely negative.

The stock markets gained in only 7 out of 21 trading days in August, as corporate earnings fell short of consensus estimates.

Dangote Cement, Nigeria’s largest company by market value, reported in August that group gross profits rose a mere 1 percent to N133.5 billion, as productivity got crimped by gas shortages.

Guaranty Trust Bank, the biggest lender by market value, reported second quarter results showing a 10 percent decline in Profit after Tax due to an increase in loan loss expenses of 287 percent.

AIICO and Mansard insurance recorded declines in income whilst operating expenses increased.

Only the oil and gas sector index has recorded gains year to date, out of the major indices including Banking, Insurance, and Food and Beverages.

Analysts say a rate hike in United States may see investors seek opportunities in other markets, helping to accelerate the sell-off, even as the new capital regulation for financial institutions leads to rights issues that may depress stock prices from supply overhang of shares.

The stock market correction is set to continue, as a potential rise in interest rates may induce exit of funds from equities, according to FDC.

“Q3 results will not be exciting for most corporates and the NSE ASI might dip below 41,000 points in the month,” said Rewane.

“However, opportunities exist for discerning investors as the banking sector remains attractive.”