Outlook for 2020 favours the Nigerian equities market according to United Capital analysts, who say that the probability of a rebound seems more likely for the undervalued market than a further downturn.
Analysts at the Lagos-based investment bank in an outlook report said they expect the Nigerian Stock Exchange, which has declined for the last two consecutive years, to return 5.3 percent in 2020.
“Our Base case scenario sees equities market return at 5.3 percent, driven by low rate environment and increased system liquidity in 2020,” United Capital said in its annual outlook report.
While base scenario projects 5.3 percent gain, a best-case scenario suggests a 23.6 percent rally while the worst-case scenario would be -16.3 percent, they said.
Tepid macroeconomic environment and uncertainty about policy directions were major weights on stocks in 2019, despite a relatively uneventful conclusion of the general elections.
Nigerian stocks slid for the second year in a row to return -14.6 percent last year, while global stocks rose 25.2 percent, Frontier Market gained 13.5 percent and Emerging Market advanced by 15.4 percent.
However, technical analysis of the performance of the NSEASI over the last decade allays concern for investors about a potential further decline in the market in 2020.
“Looking closely, while the lowest level of the index over the last 10 years can be traced to 20,000pts in 2011, we strongly believe realistic support level or the bottom can be pegged at 22,465pts index levels in 2016,” United Capital said.
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Beyond, technical analysis, the analysts say that Nigerian equities are attractive enough for investors with a medium to long-term view.
However, for an attractive market valuation to trigger a rally, the macro picture must look good to spur domestic and foreign investment, they said.
Data from the investment bank shows that as of December 2019, Nigerian stocks at 7.1x continued to trade at a bigger discount to its 5-year average P/E of 12.2x. (P/E was 9.0x in 2018)
Compared to peers, the Nigerian market trades at a deeper discount to Emerging Market (14.3x) and Frontier Market (12.2x) peers, despite the two major listings in 2019.
For 2020, growth is expected to be modest but macroeconomic environment may not compelling enough for the return of the FPIs.
The analysts say the low-interest-rate environment is expected to increase the money supply, reduce the cost of borrowing, support investment, output and translate to better profitability as well as increased wage bill and the border closure.
However, pressure on disposable income as well as a segmented money market which favours FPIs, distorts the expectation, United Capital says.
The favourable base case of 5.3 percent gain in 2020 by United Capital assumes that the CBN will sustain its unorthodox policy stance, particularly concerning OMO sales to FPIs.
However, the realisation of such performance remains linked to broader economic outcomes with a bear case scenario of a 16.3 percent decline in the market should developments in the macroeconomic environment deteriorate.
“Finally, we do not rule out the possibility of rebound, if development in the economy improves considerably, as such, our Bull case scenario projects a 23.6 percent upside for the Nigerian bourse,” United Capital said.
