6 December 2017

Nigeria: Stock Market Recovery Crystalises

analysis

Goddy Egene writes that with a gain of over 40 per cent and less than a month to the end of 2017, the stock market is set to close the year on a high note, after three consecutive years of decline

It is has now become very obvious that the Nigerian equities market will close the year on a positive note after three years of consecutive decline. The Nigerian stock market recorded its third consecutive decline in 2016 with the Nigerian Stock Exchange (NSE) All-Share Index (NSE ASI) falling 6.17 per cent. Before then, the market had depreciated by 16.14 per cent in 2014 and 17.3 in 2015.

Speaking on the 2016 performance of the market , the Chief Executive Officer of NSE, Mr. Oscar Onyema said: "After peaking at 31,071.25 in June 2016, an increase of 8.48 per cent over the 2015 closing value, the NSE ASI began to retreat to negative territory as total foreign inflow dropped 45 per cent between June (N42.46 billion) and July (N23.43 billion) due to: loss of confidence in the implementation of an announced free floating foreign exchange (FX) regime; weak corporate performance; and second consecutive quarter of negative economic growth in the period resulting in the economy entering into a recession."

However, the market is set to record a great rebound and end the year with a significant jump. Already, as at end of November 30, the market had recorded a growth of 41.2 per cent. This implies a monthly average appreciation of 3.7 per cent in the last 11 months. Market analysts believe that with just one month to go, the market cannot record any decline that could wipe away the gains recorded so far. Hence, stakeholders are in celebration mood as they hope for a bountiful harvest at the end of 2017.

Optimism for Recovery

Right from the beginning of the year, Onyema and many other stakeholders were optimistic that the market will recover this year. According to the NSE boss, the capital market is a subsector of the Nigerian economy and the World Bank had projected that the economy will recover from its recession in 2017 with a modest growth of 0.6 per cent.

Onyema, therefore said based on the positive forecast and the initiatives being in place by the NSE, investors should be optimism about recovery of the market in 2017.

He said the Nigerian capital market will do a better job at promoting its unique value proposition to both global and domestic investors.

We expect investors to continue to keep a close eye on the divergence between the interbank FX rate and other exchange rates in the country. Accordingly, a convergence of FX rates in the country and the performance of listed corporates will determine the level of market activity in the short term," he said.

Onyema disclosed that the NSE will take an adaptive approach to strategy execution in 2017, noting that in the immediate future, the NSE will focus on achieving its goal of becoming a more agile and demutualised exchange and will fast track efforts towards developing innovative products such as exchange traded derivatives to provide investors with tools to better weather economic realities in 2017.

"We intend to strengthen our thought leadership efforts with policymakers to drive policies that will free up the system and promote the ease of doing business in Nigeria. We believe that incentive schemes for sectors of the economy that can support a pivot to export led economy will be beneficial and systematic removal of impediments to doing business and therefore reduction of leakages will attract private sector investments," Onyema said.

Analysts Bullish

It was not only Onyema who was bullish on the future on the positive performance of the market this year, analysts at FSDH Research and Cordros Capital Limited were equally convinced that the market would close in the green.

They had said that at the strong growth in the unaudited results that quoted companies released for the period January - March 2017 and the improvement in the macroeconomic environment, we believe the equity market is ready for a recovery in 2017.

The analysts explained that the increase in the supply of foreign exchange to meet the input requirements of manufacturing companies should increase their production activities and revenue in the current financial year.

They said data from the National Pension Commission (PenCom) on the allocation of the Pension Fund Assets as at February 2017 shows that the weight of the pension fund assets on domestic equity dropped consistently from 2014 to 2017, noting, however, that there are indications that there is room for pension fund assets to allocate more funds to equities.

FSDH added that the value of equity transactions from foreign and domestic investors declined between 2014 and 2016, explaining that although the relative size of foreign investors' participation in the equity market declined between 2014 and 2016, the share of foreign investors' participation was higher than domestic investors' participation between 2014 and 2015.

"The stability in the macroeconomic environment and the strong earnings of quoted companies should attract the needed liquidity into the market. Consequently, the equity market should record a strong recovery in the year 2017," they stated.

In the same vein, analysts at Cordros Capital had said the better-than-expected Q1 results would bolster the market to sustain positive growth in April.

"We expect the current improvement - albeit modest - in the macroeconomic environment, especially the currency space, will further stoke investor appetite, particularly in the event of no negative surprise(s). Better-than-expected first quarter results (we expect a few top names to announce results before the end of the month) may act as catalyst," they said.

Forex window boost

The major factor that led to the rebound in the market was the introduction of Investors' & Exporters' (I&E) FX widow by the Central Bank of Nigeria (CBN) in April.

Commenting on the new policy, analysts Cordros Capital Limited said they sensed improved investor appetite for risk assets on the Nigerian bourse, judging by market activity and the spike in the number of deals and the volume of shares traded shortly after the introduction of the policy.

They linked the performance to reduced apprehension in the macroeconomic environment, impressive full year 2016 and 2017 first quarter (Q1) results of highly capitalised companies, as well as increased confidence and liquidity in the forex market.

Speaking in the same vein, analysts at Afrinvest said foreign investors' appetite for Nigerian assets had waned significantly on the back of the currency crisis, which in turn had fundamentally weakened macroeconomic environment, dragged corporate earnings, and impacted negatively on the equities market.

"However, in April, investor sentiment strengthened following the commencement of I&E FX window which signalled a possible return of flexibility in forex rate determination, though multiplicity of rates at the official window is still a concern.

Counting the gains

The market rally that has led to a gain of 41.2 per cent year-to-date, has also impacted positively on many stocks. Some of the companies have fetch investors a capital gain of over 100 per cent. For instance, Fidson Healthcare Plc has recorded a gain of 196 per cent as at end of November 30, 2017. Dangote Sugar Refinery Plc chalked up 195 per cent. May & Baker Plc has appreciated by 183 per cent, while Stanbic IBTC Holdings Plc garnered 183 per cent.

C & I Leasing Plc have also witnessed capital growth of 168 per cent, while Fidelity Bank Plc has posted 145 per cent gains. Dangote Flour Mills Plc and United Bank for Africa Plc recorded 142 per cent and 122 per cent respectively.

Other top gainers include: Newrest ASL(138 per cent); Cement Company of Northern Nigeria (97 per cent);NASCON Allied Industries Plc (87 per cent);Flour Mills of Nigeria Plc (81 per cent); GTBank Plc (74 per cent);Zenith Bank Plc, Beta Glass Plc (69 per cent apiece); Okomu Oil Palm Plc (67 per cent); Presco Plc (64 per cent) Nestle Nigeria Plc (62 per cent).

Sustaining the rally

Although the market will close the year on positive note, some market stakeholders have suggested ways to sustain the rally going forward.

According to them, enforcing rules that re-assure investors of the safety of their investments and by implementing some initiatives that were introduced but abandoned, would help to sustain the rally.

An investor, Mr. Moses Igbrude of Independent Shareholders Association of Nigeria (ISAN), said apart from retail investors, many institutional investors and pension funds have remained wary of the market, and for good reason.

"The experience of a severe market decline in 2008/09 is still fresh in many portfolios. As the largest base of institutional funds to deploy, they are a significant resource for the sustenance of the market. However, they would have to have the confidence from regulators and operators that safety checks are in place and rules will be enforced to ensure that pensioners assets are not taking undue risk," Igbrude said.

Also, a stockbroker noted that revisiting the introduction of short selling and security lending will help.

According to the broker, the market has always considered introduction of shorting and securities lending.

"These two products are a key hedge that pension funds can turn to in building income streams for their portfolios and limiting downside risk for the equity portion of their exposure. Also, as part of efforts to address the effects of unsupervised margin activity in 2008, the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) issued margin guidelines in 2010 with the SEC actually issuing a margin list on June 14, 2013. Sadly not much has been heard of these two notable initiatives," he said.

The broker added that the issue of market makers that was introduced by the NSE some years back. The NSE had introduced its market classifications and also its basket of securities for market makers. But there was no follow through and these two initiatives have complimenting ties to the steps taken by CBN/SEC to ring fence the universe for participation in the market.

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