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BusinessDay
Nigeria's leading finance and market intelligence news report.

Nigeria’s low market Cap to GDP ratio shows stocks are cheap

As of today, the Total Market Index is at $30 billion or N13.50 trillion, which is about 8.76 percent of the last reported GDP, as stocks are increasingly becoming cheap.

The country’s market cap to GDP ratio in 2019 was 9 percent of nominal GDP, compared to 9.20 percent in 2018. The data reached an all-time high of 29.7 percent in Dec 2007 and a record low of 3.0 percent in Dec 1985.

As pointed by American billionaire investor Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

The stock market capitalization-to-GDP ratio otherwise known as the Buffet indicator is a ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average.

It is a measure of the total value of all publicly traded stocks in a market divided by that economy’s gross domestic product (GDP).

If the valuation ratio falls between 50 and 75 percent, the market can be said to be modestly undervalued.

While the Nigerian stock market begun the year on a positive note, it has continued its bearish run as the NSE ASI recorded a negative year to date of -17.3 percent.

The outbreak of the coronavirus that is increasingly crippling the global economy and the sharp drop in oil price due to disagreement between Saudi Arabia and Russia has further damped investors’ appetite for the country’s equity market.

Analysts say aside lack of clarity on policies for sustainable economic growth, a major risk facing Nigerian capital markets in 2020 stem from recent policies of the Central Bank of Nigeria (CBN) and their possible negative impact on banking sector profits.

Following CBN’s announcement barring non-banking corporates as well as individuals from accessing the OMO market, increased liquidity in the secondary debt market as well as auctions has since sent yield crashing.

The hike in Loans to Deposit ratio to 65 percent and the slash in charges by apex bank have crimped lenders earnings as  gleaned from  their 2019 audited financial statement.

The equities market was in the negative region of -17.80 percent in 2018 and 14.60 percent in 2019 as the, devaluation of the currency and sustained pressure on oil in the mid 2014 convulsed investors and kept them out of the market.

Expectedly, foreign portfolio investment (FPI) interests in Nigeria’s risky assets have been stagnated.

Reflecting the subdued participation of foreign investors in the local bourse, data from the Nigerian Stock Exchange (NSE) showed that foreign inflows from January to November 2019 declined 28 percent to N397.44 billion from N553.47 billion in the same period in 2018.

The data further revealed that net outflows from January to November increased 62 percent to N84.53 billion from N52.07 billion in the same period in 2018.

Despite the macroeconomic uncertainties as evidenced in rising inflation that has continued to pressure consumer wallets and undermine company profit, the stock market valuation remains compelling.

Across Emerging Markets (EMs) and Frontier Markets (FMs), Nigerian equities remain unarguably the cheapest.

The ASI had a price to earnings (PE) ratio of 6.48 x compared to MSCI EM and MSCI FM of 15.4x and 10.6x respectively. African peers like South Africa, Egypt and Morocco traded at trailing PE ratios of 15.7x , 11.8x, and21.1xrespectively.

On the local bourse, banks’ stocks are the most attractive as Zenith, GTBank, Access Bank, UBA, and First Bank are trading at a price multiples of 1.83, 2.63, 1.99, 2.02, and 2.81.

However in the short term there are negative prognoses for the country’s stock market as the coronavirus pandemic has forced governments across the globe to announce shut down of schools and restaurants while workers now most work from home.

The airlines industry has grind to a halt while conferences across the globe have been cancelled.

The price of Brent-the international oil benchmark has more than halved to $30 per barrel.

That has hurt Nigeria’s revenue as external reserves fell below $36 billion mark, touching the lowest in 29 months. That cast a pall on the ability of the country to weather external shocks.

The central bank has been under immense pressure to weaken the currency amid global macroeconomic uncertainties. The apex bank has moved the foreign exchange sales to FPIs to N380.20/$, from N366./$, in a move that suggests the defacto devaluation of the currency.

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