On a scale of impressive return profile in 2013, attractive demographics, eye-catching market PE, strong domestic macroeconomic fundamentals, the fragility of the fund flows into emerging and frontier markets, uncertainties in the global economy, monetary policy concerns and heightening political intrigues in the domestic economy, analysts’ expectation for 2014 remains modest.
Uncertainties in the global economy, monetary policy pronouncements and market sentiment continue to depress the performance of the market. Perhaps one would have expected a ‘January effect’ to advance the market further given 2013 performance, data suggest market mood is hazy, as investors seems to be in search for an optimal strategy to guide them through a slippery route.
CRR and QE-tapering depresses market mood
With a fantastic 47.17 percent YtD return in 2013, the Nigerian equities market was the second best performer in Africa. This positive momentum though calm, was only sustained for few trading days into the year (advancing 0.07%, 0.73% and 0.40% respectively in the first 3 weeks of the year). The index took a down swing following CBN’s announcement to raise CRR on public sector deposit from 50 percent to 75 percent (market dipped -3.21% in the following week and January returns plunged to -0.34%). While investors were still reacting to the CRR hike, events in the global economy further depressed the market as Fed announced its decision to go ahead with QE-tapering as earlier planned. The sell offs witnessed in other emerging markets further extended the level of uncertainties in our market.
Fund flows: Portfolio re-assessment suggest exit
The US Fed’s decision to commence QE3 ($85bn assets purchase) in September 2012, having lowered interest rates earlier resulted in a large flow of funds into emerging markets in search of attractive returns. The Nigerian equities market benefited from the funds flow as foreign participation in the NSE improved.
Our panel study of the Nigeria equities market shows that certain stocks with parent companies domiciled abroad have enjoyed continued foreign investors bias and patronage over the years. This trend continued into the first half of 2013 as foreign investors transaction improved from 36.89 percent in January’13 to 51.13 percent in June’13.
In December 2013, the Fed announced its decision to taper by USD10bn (effective January) and a further $10 billion scale down in assets purchases to take effect in February. Subsequently, we have noticed a bearish trend on those stocks that enjoyed foreign sentiment and it may be an indication of portfolio reassessment and capital flight from the Nigerian bourse. Our measure of foreign portfolio presence suggests -3.08 percent return YtD.
Heightening political tension… a source of concern
The Nigeria political space is getting increasingly tense as the 2014 election in Osun and Ekiti states, and the 2015 general elections draw nearer. The opposition parties continue to strengthen coalition with heightened rate of cross carpeting of political big-wigs from the ruling party to the opposition. The extent to which this political event will impact the financial market remains unclear.
Current issues
Gale of defections sweeping across the National Assembly
Dissatisfaction by the opposition with the INEC timetable
Jega’s statement of a “not so perfect” election.
Likely outcomes
• Delay in the passage of the budget due to the defection crisis rocking the House.
• Heightened tension in the political environment.
• Possible power tussles in the opposition camp.
We see these likely outcomes key concerns as investors negative reaction to them may breed further uncertainty going forward.
Dangote Cement’s effect on equities return – too weighty?
Given Dangote Cement’s weight of about 27 percent of the total market capitalisation, assessing its contributions to the equities market return is critical. Dangote Cement contributed 12.84 percent of the entire market returns in 2013; without Dangote Cement the NSE ASI would have returned 36.77 percent.
Furthermore, decomposing the 2013 return, the Nigerian bourse would have returned 46.84 percent Ex-Top 10 most capitalised stocks, which cumulatively account for 70.5 percent of the aggregate market.
Fundamentals portend attractive yields
Banking sector: Banking sector recorded loan growth of 19 percent in Q3:2013 as against <10 percent in 2012, indicating higher risk asset creation maintain profitability in the face of mounting costs. We expect the 2013FY earnings of banks to increase by 26.24 percent YoY despite the difficult operating environment. We also anticipate an average dividend yield of 8.36 percent for the banking stocks.
Consumer goods: In the FMCG sector, we forecast an average 2013FY earnings growth of 17.5 percent.
