Earnings growth can’t tame rampaging Bears on NSE
Impressive results by bellwether firms particularly in the banking sector haven’t been enough to whet investors’ appetite for cheap stocks as protracted macroeconomic uncertainties have left the local bourse in a lull.
Federal Government has failed to formulate policies that will help propel economic growth after the country exited its first recession in 25 years.
Additionally, inconsistencies in policy making, uncertainties on implementation of structural reforms and unfulfilled economic potential have increased investors apathy towards Nigeria equities.
Nigeria’s stock market dipped by 0.25 percent to 26,293.3 points Friday with year to date returns now -16.34 percent.
Following close of Friday’s trading session, the Nigerian equities market traded at a P/E ratio of 7.18x, according to data from gathered from Bloomberg.
That’s a steep discount to African peers such as South Africa (14.74x, YTD; +6.1 percent), Egypt (12.26x, YTD; +9.7 percent) and Morrocco (19.77 percent, YTD; +1.3 percent), as there exists an increasing divergence between earnings growth and stock market returns.
Analysts at CSL research Ltd said that over the past one year listed companies in the All Share Index have posted a 15.3 percent 1-year growth in Earnings while the ASI has plunged 20.5 percent within the same period.
“As long as the macroeconomic outlook is not impressive, investors will not invest their money no matter how cheap stocks are,” said Kayode Tinuoye, head of portfolio management at United Capital Ltd.
“Government is yet to carry out reform that will help jump start the market, and hike in Value added Tax (VAT) has further damped consumer spending,” said Tinuoye.
Over the last six months, Nigeria’s real economic growth though remaining positive has decelerated for 2 consecutive quarters, positing GDP of 2.10 percent in the first quarter (Q1) of 2019, a decline from 2.38 percent recorded in the fourth quarter (Q4) 2018 and growth of 1.90 percent in the second quarter (Q2) 2019, which marked another decline from Q1 levels.
Earlier in the year, The International Monetary Fund (IMF) had lowered the country’s growth outlook to 2 percent, from 3 percent projected in 2018.
The Fund also downgraded global growth, citing trade war between the United States and China, uncertainty surrounding Brexit, and economic slowdown in the Euro area economy.
Based on GDP per capita, Nigeria ranks 147th position, its population has a low level of affluence compared to the 196 countries whose GDP were published by Trade and Investment Organization.
The country’s foreign reserves fell by $1.26 billion from $41.76 billion in October to $40.5 billion as of the end of October 30, according to figures from the Central Bank of Nigeria (CBN) on Thursday.
“We expect investor interest in Nigerian equities to remain subdued until the government and economic policymakers begin to implement assertive and bold policies to drive accelerated economic growth in bid to fufill Nigeria’s enormous economic potential as an economic powerhouse in Africa,” said analysts at CSL Stock Brokers Limited.
Earnings report by companies showed Banks were star performers as the cumulative net income of 11 largest lenders increased by 12 percent to N627.27 billion in the first nine months to September 2019. A stringent Central Bank of Nigeria (CBN) combined with a low yield environment could however cast a pall on future earnings.
Cement makers have continued to show resilience even amid slow construction activities and border closure as the combined net income of the largest producers of the building materials (Dangote Cement Plc, Cement Company of Northern Nigeria, and Lafarge Africa Plc) rose by 23.87 percent to N183.24 billion.
Seplat Petroleum Development Plc Corporation and Oando Nigeria Plc, the two largest upstream oil and gas firms saw cumulative net profit spike by 80.0 percent to N39.068 percent, thanks to tax credit.
The telecoms giants Airtel Africa Plc and MTN Nigeria have continued to leverage on their 4G to spur growth while taking advantage of a burgeoning population that crave for consumption as combined net income increased by 17.95 percent to N376.32 billion as at September 2019.
However, not all the companies on the exchange have been posting impressive earnings growth.
Earnings of Fast Moving Consumer Goods Firms (FMCGs) have lagged, owing to poor demand from an increasingly shrinking consumer wallet as over 50 percent of a population of 200 million live on less than $1.98 a day.