A 2.78 percent fall in the Nigerian Stock Exchange (NSE) broad index in January did not only wipe off the 1.80 percent gain recorded in the previous month, it also dampened the benchmark index.
In spite of this, the NSE Industrial Index stood tall among its peers, gaining 5.78 percent in the review month with a total volume of 60.97 million shares traded in one month, even as four other major sectors sank into losses.
Of the five major sectors on the NSE, two – Industrial Index and Banking Index – outperformed the NSE All Share Index (ASI) in January, just few weeks before the nation’s general elections, where President Muhammadu Buhari of the ruling All Progressives Congress (APC) will be contending with former Vice President Atiku Abubakar of main opposition party, Peoples Democratic Party (PDP), and other candidates for the Office of the President.
This makes investment decision more challenging as Nigeria progresses into the election month scheduled to kick-off on February 16. But according to analysts, while some equities are most likely going to sustain their positive momentum regardless of the current political events, some others would likely have their values washed off in the short term.
In February, analysts see market’s reaction to bad news in the political space to be elevated as it would determine the market direction. Relative peace in the country before, during and after the elections is seen to inhibit further declines in share prices.
With this in mind, the performance of stocks going forward as the election month begins remain a concern for investors willing to take positions now for long-term returns, but BusinessDay analysis and outlook from analysts as presented below would help guide investors in this dilemma.
While other sectors wallowed in losses in January, the industrial stocks flourished with 5.78 percent gain, its best monthly surge since January 2018, thanks to the cement makers – Cement Company of Northern Nigeria (CCNN), Dangote Cement and Lafarge Africa – that made it happened in that order.
Paul Aluko, a research analyst at MBC Securities said investors were attracted to the cheap valuations of Dangote Cement and also an impressive share appreciation of CCNN last year having emerged the best performing stock for the year.
“The price –Dangote Cement – has really gone down to a point that investors feel it is ridiculous for them to be trading at the level,” Aluko said.
CCNN and Dangote Cement “have good records of dividend payment and they have been consistent over the last five years.”
We expect CCNN and Dangote Cement to continue in this trend on strong fundamentals and market penetration. However, political sentiment will likely play a major role in the short term as Nigeria goes to the polls. We are likely to see mild downward pressure on prices.
The first month of the year saw increased investors’ appetite for mid-tier banks as they dominate advancers’ chart. But losses in the tier-one banks pulled the sector index down by 2.49 percent, even as they continue to top analysts’ ratings for long-term investment owing to their resilience, particularly Zenith Bank and Guaranty Trust Bank.
“We have seen them – Zenith Bank and Guaranty Trust Bank – deliver good dividend over a long period of time,” Ayodele Akinwunmi, head of research, FSDH Merchant Bank.
On what triggered the appreciation in the tier-two banks, Akinwunmi said the effect of the appreciation in Diamond Bank shares on account of announcement of the merger and acquisition with Access Bank have its multiplier effect on other tier-two banks, while Gbolahan Ologunro, an equity research analyst at Lagos-based CSL Stockbrokers attributed the gains recorded by the mid-two lenders to dividend expectation as declared earlier by some of the banks.
The gains imply “early positioning for their full-year earnings that would be accompanied with dividend.”
“For the banking stocks generally, what we are going to be seeing is a zigzag change in their prices. That is due to a likely tussle between the bulls who want to position in these stocks for their full-year dividends, that would also be seeing the bears booking profits on the back of a rally in their share prices, more importantly, because of high political risks in the economy,” Ologunro said.
Oil & Gas Sector
The Oil & Gas sector recorded the worst decline among its peers in the just-concluded month, dropping 7.27 percent largely driven by a 16.41 percent plunge in Seplat shares.
Seplat operates in the upstream sub-sector of the Oil & Gas industry and analysts have attributed its share performance to the dwindling crude oil prices which have impacted negatively on the oil firm’s earnings. Recently, Seplat’s shares fell to a one-year low of N520.
“What I see affecting the sector, especially for Seplat is oil price,” said Ayodeji Ebo, Managing Director, Afrinvest Securities Limited. But in February, Ebo said political developments will shape investor sentiment and performance in the month is “going to be scenario-based.”
“All the companies in the Oil & Gas sector that are into production – Upstream sub-sector – will naturally do well if oil prices are up,” said Henry Obuaku, head of asset management at GDL.
Consumer Goods Sector
The consumer goods stocks trailed their peers in the Oil & Gas sector in share devaluation, as the sector index dipped 6.77 percent in January largely triggered by declines in Nestle Nigeria, beer makers, particularly Nigerian Breweries and Guinness Nigeria, and Dangote Sugar.
Vitafoam emerged the lone gainer in the sector for January having gained 9.09 percent.
Paul Uzum, a Lagos-based stockbroker at the Nigerian Stock Exchange attributed the decline to the drop in the share prices of Nigerian Breweries, which dominates the sector, and other brewers to their recent unimpressive finance results, causing investors to dump the stocks in anticipation for further contraction in their earnings.
“If anything happens to Nigerian Breweries, it will affect the consumer goods sector,” Uzum said. “Not just the Nigerian Breweries, the brewery sector has been seriously challenged since the incoming of this administration.”
The brewers’ poor financials were largely driven by sales plunge and shrinking profits, no thanks to the recent excise duty imposed on alcoholic products by the Nigerian government.
The stockbroker said “this is just the beginning,” the decline might continue “except there is a revision on sales caps policy on alcohol.”
However, Uzum noted that Nestle is the only exemption in the sector because of its nature of products which enjoy continuous demand. “No matter how bad things are, they will still make sales.”
Gains in Cornerstone Insurance, Custodian Investment, Mutual Benefits Assurance, Prestige Assurance and AXA Mansard Insurance were not enough to sustain last December’s appreciation in the NSE Insurance Index, this is as a result of heavy depreciation in NEM Insurance, Linkage Assurance and Law Union & Rock which combined to weigh on the index, pushing it down by 3.26 percent in January.
The outlook of the insurance sector of the NSE will be largely dependent on the fundamentals of the company when they release their full year 2018 financial report.
Also, macro-economic factors and industry specific factors will play a significant role in determining if these companies will see increase in premium income.
Performance of major NSE Sectorial Indices in January 2018
|Sectorial Index||Year-to-Date Performance||Volume Traded YTD||Index Movers|
|Banking Index||-2.49%||3.69 Billion||Access Bank, UBA, FBHN,GTB, Zenith Bank|
|Insurance Index||-3.26%||409.77 Million||NEM, Linkage Assurance, Law Union & Rock|
|Consumer Goods Index||-6.77%||186.63 Million||Nigeria Breweries, Nestle, Guinness Nigeria, Dangote Sugar|
|Oil & Gas Index||-7.27%||24.07 Million||Seplat, MRS Nigeria, Eterna Oil|
|Industrial Index||5.78%||60.97 Million||CCNN, Dangote Cement, Lafarge|
|All Share Index||-2.78%||5.74 Billion||Nigeria Breweries, Seplat, Nestle, UBA, Access|
|Source: Bloomberg Terminal, BusinessDay Analysis|