The Nigerian bourse swung in opposite directions in January, majorly dominated by negative sentiment towards the end of the month in contrast with the positive note it started the year with. The significant sell-off on the fourth trading day of the second week (January 9) led to a loss of 1.12 percent. Relative calm returned to the market thereafter with the index trending towards positive territory before the mood abruptly evaporated by the fourth week of the month, largely due to the CBN’s decision to raise CRR on public funds to 75 percent.
Banking stocks dictated the direction of the market, shedding 301bps (3.01%) post announcement of the CRR hike on public deposit to 75 percent from 50 percent, with the NSE ASI losing 1.10 percent on January 22. Although market recouped the losses the very next day (by gaining 1.18%), this gain was not sustainable as the index closed lower all through the following week to peg YtD return at -1.83% by month-end.
Banking stocks to face increased sell demand?
On February 4, 2014, as the 75 percent CRR on public sector deposits took effect, approximately N995 billion is expected to be withdrawn from the banking system with rife sentiments that CRR may be hiked to 100 percent before the end of H1’2014. Consequently, fewer funds would be available for risk asset creation and investment securities while stiffer competition for retail deposits will likely take the centre stage.
Thus, we expect loan growth to take precedence over investment securities (even as the real sector may find it difficult to access funds as higher rates are anticipated). We envisage higher cost of funds that would contract margins, particularly for banks with more exposure to the public sector such as Skye Bank and FBNH.
First quarter earnings are not likely to be impressive given all the constraints in the operating environment and this will possibly further thrust banking stocks downwards. In view of this tapering income, banks need to start considering strategies to optimise profits in the quarters ahead.
Ahead of 2013FY results
With the earnings season drawing nearer, full-year performances will play a major role in the direction of equities performance. Companies with good track records of dividend payment would possibly enjoy price appreciation as investors key into stocks with likely exciting dividend yield income, in addition to capital gains. So far, equities market in 2014 did not repeat 2013 history, apparently buoyed by differing market realities.
The banking sector is estimated to grow bottom line by 7 percent in 2013 compared with c.100 percent in 2012. Insurance companies recorded strong earnings performance in Q3:2013 and we expect this trend to be sustained till 2013FY with an estimate of 16.74 percent growth for the major operators in the sector. We forecast 0.72 percent earnings growth for the consumer goods sector. Industrial goods sector is estimated to grow bottom-line by 20.9 percent driven significantly by WAPCO’s contribution, while for the oil and gas sector, we expect 71.25 percent growth in earnings.
Our analysis of companies with possible strong dividends shows an average 7.88 percent dividend yield. We expect a few sectors, most especially, consumer goods and banking to enjoy rally from February till end of March as investors take positions ahead of corporate benefits’ announcements. Companies with impressive 2013FY growth in top- and bottom-line figures will also enjoy investors’ patronage.
Federal Reserve tapers Quantitative Easing by another $10bn
Emerging and frontier markets are already reacting adversely to the US Fed’s tapering of Quantitative Easing (QE), Nigeria not being an exception as the threat of capital reversal looms. The FOMC in its final major decision under the leadership of Ben S. Bernanke voted to taper the QE by another $10 billion, causing bearish mood across markets in the last few days. We believe that further tapering in the coming months will pose further threats to emerging and frontier markets. This may not bode well for Nigeria’s equities market in particular as investors will increase appetite for fixed income instruments.
US treasury will reach debt ceiling on February 7
The US treasury will likely hit the debt ceiling earlier than expected. A surge of February spending, mainly for 2013 tax refunds will leave the treasury unit with little room to manoeuvre after the official debt limit is reached on February 7. Failure to raise the debt ceiling will do a serious damage to the global economy and markets.
While we believe the debt ceiling will be raised, we foresee a bit of shake-off between the Democrats and Republicans for a while, which might have a slight effect on global markets that detest uncertainty.
Funds flow reversal to mount pressure on the naira
In January, the naira depreciated by 1.35 percent against the US dollar to close at N162.50/$ at the inter-bank market. The official rate commenced the year at N154.70/$ and closed at N155.75/$ by the end of January, representing a 0.68 percent depreciation as the CBN remained resilient in its defence of the naira.
Following decision to remove the limit on BDC sales, rates in this segment of the market appreciated by 3 percent week to date, to close at N168/$ at the end of the month. We believe that a continued reduction in the US stimulus will pressure the Naira further.
Domestic risk/return profile to moderate fund inflow
In 2014, global economic recovery is expected to gain momentum (growth estimate of 3.6% vs. 2.9% in 2013) and the domestic output is estimated to expand by 6.75 percent. Inflation rate is projected to remain single digit while the country’s credit rating remains stable (Fitch BB-/stable). Generally, attractive equities market pricing compared with peers (14.28x vs. global average of 18.78x), coupled with a high yield environment portray positive sentiments for the economy.
Our concerns for the domestic economy going forward remains the possible impact of fund flow reversals as a result of QE tapering, high uncertainties in the political space, as well as the change in the office of the CBN governor.
We expect QE retrenchment to further pressure the naira and depress equities market in the short to medium term. However, we believe the Nigerian market remains attractive, valued at market PE of 14.28x while the yield environment should keep funds inflow relatively moderate in spite of the US QE tapering.
Conclusion
Although the equities market sentiments are downbeat, relative pricing reflects investors would still reap good returns with companies’ corporate actions to serve as the major driver. While QE tapering poses a major downside to the exchange rate, the attractiveness of yields at current levels compared with peer countries will sustain the flow of funds. Hence, the need for investors to stay calm as macro-economic indicators as well as supply and demand dynamics stabilises in the near term.
