Cautious mood trails equities as investors price-in market risks

Domestic and foreign investors at the Nigerian equity market are still cautious in their betting decisions on stocks, particularly as the nation political and security risk heightens.

Also, continued bombing in the Northern part of the country by Boko Haram insurgents has further created holes in the revenue line of most listed consumer goods companies who before now had major chunk of their revenue from the region.

Another negative force to the foreseen calmness in the equities market results from the nation’s foreign reserves, which last week was at year-to-date (ytd) low of $37.37 billion, a development market analysts say suggests bumpy future for the naira. The stability of the naira is a key concern for foreign portfolio inflows, particularly the equities market.

While validating analysts’ call, the Monetary Policy Committee (MPC) last week maintained the status quo in their decisions across rates, a development seen to be preparing the ground for a smooth take off by the new CBN governor in less that one week from now.

Though increased buying helped to spike stock prices last week and further reduced the market’s negative returns to 3.62 percent, analysts doubt the possibility of sustaining the momentum – a development that already reflected on the market’s performance indicators at the beginning of trade this week.

While many analysts say they anticipate more upside positions for stock prices this week, others chose to be neutral in their expectations; while others expect that the stock market will continue to trade cautiously as we draw closer to the 2015 election year amid heightening political risk.

Last week, the Nigerian Stock Exchange (NSE) listed by introduction 3.35 billion units of Caverton Offshore Support Group plc shares at N9.50, a development that added about N31.83 billion to the market capitalisation of the NSE.

The NSE All-Share Index (ASI) and market capitalisation appreciated by 2.08 percent and 2.34 percent to close on last Friday at 39,831.83 points and N13.152 trillion, respectively.

Some schools of thought within the market expect to see increased speculative buying activities on low cap stocks, combined with profit-taking to allow for realisation of accrued gains; others say the upbeat mood in the market is capable of ushering in the upside potentials for stock prices.

Week-on-week (WoW), a turnover of 1.869 billion shares worth N23.917 billion in 23,554 deals were traded by investors on the floor of the Exchange in the week ended May 23, 2014, compared with a total of 1.675 billion shares valued at N20.861 billion that exchanged hands the preceding week in 24,513 deals.

While taking a look at the market this week, Morgan Capital analysts say they expect the equity market “will continue to trade cautiously as we draw closer to the 2015 election year and political risk heightens.”

According to these analysts, “it is no longer news that the hike in CRR for public sector deposits to 75 percent in the first MPC meeting of 2014, had a major impact on the ability of banks to grow interest income, given their reliance on public sector deposit. What is news though is that a lot of banks are either in the process of raising fresh capital through right issues to shore up their book value position or are acquiring tier two capital to boost their interest generating capacities.”

These analysts believe that this has kept investors appetite for banking stock high, “with the sector recording a 1.87 percent growth in the just concluded trading week. The large cap companies have also seen some interest from investors and in the just concluded week, the NSE 30 index rose by 2.58 percent.”

Also taking a similar look at the market, market analysts at UBA Capital say, “while the NSE ASI rallied a strong 2.08 percent in the previous week, we expect the composite equity index to trim gains this week, amid modest headroom for profit-taking in the Consumer Goods and Oils and Gas baskets.”

These analysts add: “Notably, the nation’s foreign reserves dipped to YTD low of $37.37 billion last week, thus suggesting bumpy future for the Naira – a key concern for foreign portfolio inflows. Likewise, investors remained circumspect of 2014H2, amid enhanced political/security risks.

“Overall, the Nigerian bourse has quickened 3.5 percent in May, thus defying our expectation of a soft pullback in the month. Also, average trading activities last week was 14 percent stronger, relative to the previous week. That said, we expect trading activity level to cool off in the week, as investors tread the rally with reasonable caution.”

Iheanyi Nwachukwu