Companies listed on the Nigerian Stock Exchange (NSE) have been releasing their earnings forecast for Q4 2020, but their share prices have remained flat as investors ignore the stock market.
Forecasts on earnings by companies are meant to provoke some form of reactions from investors as share prices tend to rise when earnings exceed market expectation or fall when earnings forecasted are not encouraging, according to investment experts.
Foreign investors typically are first to react to such information in Nigeria but since they fled the market, there’s been a muted reaction to market moving information like an earnings forecast which helps investors plan their portfolio accordingly.
In the most recent trading report by the NSE, activity in the stock market, which is down some 5 percent year to date, is now dominated by domestic investors who make up 66.5 percent of the total transactions with foreign investors occupying the remaining portion of 33.5 percent.
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Source: NSE, Business Day
For the companies that are guiding towards an improved performance, the lack of movement in their share prices may provide bargain hunting opportunity for local investors as foreigners stay away from the market due to Nigeria’s fx crunch.
The accuracy of the forecasts is also crucial in shaping investor behaviour.
MRS Oil Nigeria plc, a downstream oil firm made a positive profit forecast of N775 million for Q4 2020, a 234 percent jump from the N575 million loss earned in Q4 2019.
Nonetheless, their share price has remained unchanged at N12.45.
In the insurance industry, Guinea Insurance plc has also remained flat at N0.2, despite guiding towards a 131 percent jump in profit to N247 million from a loss of N795 million in the same quarter of 2019 and an improvement from N100 million loss in H1 2020.
Read also: Nigeria’s stock market fails to sustain gains
There have also been some negative forecasts.
Okomu oil palm plc, a producer of crude palm oil, reported an impressive half-year profit of N4.007 billion but has now forecasted a 75.7 percent decline in profit year-on-year for the last quarter of 2020.
The company’s share price has however remained flat at N78 irrespective of the expected plunge in profit to N227 million by Q4 2020 from N937 million in Q4 2019.
Total Nigeria plc, another downstream oil firm is projecting a year-on-year decline in profit of 40 percent to N1.6 billion in Q4 2020 from N2.6 billion in Q4 2019. However, this is an improvement from the N537 million loss recorded at the end of the first half of 2020.
The share price of Total Nigeria has however remained unchanged at N80, its flat price over the past one month.
“The pangs of COVID-19 pandemic and Nigeria’s current economic situation has made both domestic and remaining foreign investors rather unmoved by the forecasts being made by companies”, said Boboye Olaolu, Sub-Saharan African Economist, CSL Stockbrokers.
“The illiquidity in the foreign exchange market has chased foreign investors and there are still uncertainties as we cannot exactly say that the monetary authorities have given a clear-cut policy for the unification of exchange rates,” according to Gbolahan Ologunro, Research Analyst at CSL Stockbrokers.
Oil prices have slumped below $40 per barrel and the Organisation of Petroleum Exporting Countries (OPEC) has predicted that there would be a deeper drop in global oil demand.
The oil price issues compounded with the illiquidity in the Nigerian market will continue to discourage foreign investors of the Nigeria’s stock market.
“Oil price is an important determinant of economic activities in Nigeria because we are an oil producer and the government’s fiscal policy is very much dependent on it”, said Lamido Yuguda, Director General (DG), Securities and Exchange Commission (SEC), during the 8th Investing and capital market conference hosted by Business Day.
The DG also mentioned that one of the cores of SEC’s 5-point agenda is to return investors’ confidence and promote domestic investors’ participation in the capital market.
“The market has seen lots of investors leaving in the past 10 years since the last global financial crisis, and we have just about 400 thousand accounts for Collective Investment Scheme (CIS), for a population of over 200 million people.
“This means that there is a significant amount of work that needs to be done to increase the take up of investment product among our population”, Yuguda said.
Why domestic investors in Nigeria are not reacting to earnings forecast?
Most rational investors have already priced in the negative effect of the pandemic and the drop in the global oil price as at early March and April 2020, according to Omobola Adu, a Research Analyst at GDL.
“It is more like the time of a reaction has passed as investors are positioning themselves for the dividends that they will collect for the year,” Adu said.
Nigeria’s economic fundamentals also do not support increased appetite for equities the companies, whether they are declaring higher profit or not.
The economy contracted by a record 6.1 percent in the second quarter of 2020, according to NBS data. A scathing dollar crunch has also contributed in a hobbling an economy set to contract this year for the second time in four years.
“The economy is not in a good shape, and investors can see this. The current macroeconomic environment is affecting companies based on the industry they belong to, with inflationary pressures and high unemployment rates diminishing peoples’ purchasing power,” said Ologunro.
Ologunro also mentioned that “Hardship has become the new norm for Nigerians as the current economic situation is not even giving an olive branch, so you cannot expect them to be moved by forecasts in an economy where actual figures have been worse than projections-I mean look at GDP growth rate and even the current inflation rate”.
In addressing investors’ psychology, Lilian Olubi, CEO EFG Hermes Nigeria ltd said “these are unprecedented times and many things are still unfolding. In the last boom we had, we had liquidity and issuance better than what we have now.
“A first sign of recovery is not enough, we need more sustainable recovery signs to change the cycle as only a very compelling macroeconomic story will see a new cycle emerge”, Olubi said.
“If one thing goes well and people are impressed by it, it could change the reaction of the market as more confidence is built. Major issues have to be dealt with first before we can see any proper reaction in the market, be it the fixing of FX issues or improved economic growth,” said Bunmi Asaolu, Head of Equities, FBNQuest.
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