The outcome of today’s and tomorrow’s ongoing monetary policy committee (MPC) meeting will either be a boost or a snag to current situation in the equity market, according to analysts.
In the wake of heightened security risks in the Northern part of the country, and investors recent fears over possible outcome of elections and associated risks, there has been increased outflow of fund from the stock market.
Also, increased regulatory headwinds which affect top-line figures of banks continue to be a source of concern to stockholders.
Ahead of the release of third-quarter (Q3) earnings, the stock market has been awash with a mix of bargain hunting and profit taking, even as most analysts remain positive about Nigerian equities.
In the week to September 12, 2014, the Nigerian Stock Exchange (NSE) All Share Index (ASI) and Market Capitalisation depreciated by 1.18 percent to close at 40,672.94 points and N13.430 trillion, respectively. The year-to-date (YtD) return of the Nigerian equities market remained in negative territory.
“We expect performance next week to be largely driven by the expectations and actual outcomes of the US Federal Open Market Committee (FOMC) and MPC meetings,” according to research analysts at Meristem Securities Limited, a Lagos-based investment firm.
Before now, many foreign investors had expected FOMC meeting to reveal a shift in Fed’s view Quantitative Easing (QE) exit strategy, noting that they expect some sort of change on forward guidance as Fed prepares to end its asset-purchase programme.
“We expect the market to remain relatively calm this week as market participants eagerly await the outcome of the MPC meeting scheduled for Thursday and Friday, even as the uptick in inflation is likely to trigger some policy responses from the CBN,” say research analysts at UBA Capital plc, another investment firm based in Lagos.
These analysts say: “However, we look to see some sideways trading this week as negative sentiments seem to be waning. We expect the market to close negative this week on the back of anticipated thin trading skewed towards the sell side.”
The stock market took off on a positive note this week, driven by share price gains recorded by large cap stocks. Though, the number of gainers against the losers at the beginning of trade this week shows a market still sloping in favour of the bears.
“The low activity in the market was attributed to drop in share prices of companies in banking, FMCG among others, as investors took profit from recent gains,” market analysts at Access Bank plc, say. They believe this week that: “We may see activities in the market improve slightly from current trend as stock pickers re-enter the market following weeks of declining prices.”
In another development, analysts at Renaissance Capital (RenCap) made interesting points, saying “Nigeria’s equity market is cheaper than Kenya’s and likely to outperform Kenya despite forthcoming Nigerian elections.”
They note in their recent report, that Nigeria underperformed Kenya and Frontier by more than 20 percent YtD: MSCI Nigeria -5 percent, Kenya+17 percent, Frontier +18 percent.
Yvonne Mhango and Daniel Salter, both equity analysts at RenCap, say: “Valuation support: Nigeria is trading 9.5x 12m forward per vs 10.1x for Frontier and 12.5x for Kenya. Kenya’s premium to Nigeria is currently 32 percent vs a 4 year average of 10 percent. Attractive entry point into the Nigerian earnings cycle – squeezed earnings for the banks, consumer has been under pressure: scope for EPS rebound. On elections – we see Nigeria’s 2015 elections as likely to be less volatile than some expect.
“Banks: we prefer West over East – top picks are Zenith Bank, Access Bank, FCMB, Stanbic. Nigerian consumer: we prefer Food over Brewers – top pick is Nestlé Nigeria.”
These analysts are further positive on Nigeria, saying “the country ranks far ahead of its peers, on our macro-meter, which ranks countries based on their macro credentials. Ghana comes in at the very bottom, which is not unexpected. The surprise may be Kenya ranking lower than Rwanda and Zambia. We think this ranking will become more relevant in 2015, when the external environment becomes less accommodative.
“Yes, elections are almost upon us (February 2015). But we do not think that should detract from Nigeria’s otherwise solid macro credentials – especially given our view that the electoral process and outcome will be relatively stable. On a fundamentals basis, Nigeria is well ahead of the other countries under our coverage. Thanks to an improving external position (9-10 months of import cover) and a small fiscal deficit (1-2% of GDP).”
Also on Nigeria, RenCap analysts say: “Post-elections, we expect interest rate cuts as soon as 2H15, which we think will allow YoY credit growth to pick up from current high single-digits to the mid-teens. This is positive for equities and the banks. And should also give a lift to the consumer, as the effect of any pre-election wage hikes dissipates.
However, we do not expect much upside for cement stocks, as our July discussions with the finance ministry led us to believe expansionary fiscal policy in FY15 is unlikely, due to capacity constraints and a desire to keep debt levels low.”