Market mood depressed by global and domestic uncertainties
The market resumed the year on a calm note, advancing 0.07 percent, 0.73 percent and 0.40 percent, respectively, in the first three weeks of 2014. The uptrend reversed followed the pronouncement by the CBN to raise CRR on public sector deposits from 50 percent to 75 percent after the January MPC meeting.
The FOMC decision to continue with tapering of QE further pressured the index negatively by 3.21 percent in the following week resulting in the January return settling at -0.34 percent.
The panic in the market was amplified by the news on suspension of the CBN governor, which acted to further depress investors’ confidence, dragging the ASI below 40,000pts (its psychological level), as the index lost 1.47 percent on the day the announcement was made while YtD return slid to -6.08 percent.
Nigerian equities cheap relative to peers
Current market valuation in terms of P/E and Return on Equity (ROE) shows that the Nigerian equities market is currently undervalued relative to peers in Africa and among emerging markets. The Nigerian market P/E of 13.43x is lower than that of all other African markets (except Zambia-1.05x) as well as selected emerging markets P/E (except China-10.13x) under comparison.
Nigerian bourse offers the highest ROE of 19.17 percent among compared peers in Africa and the EMEs, further buttressing the attractiveness of the equities market.
Near term factors that will shape market direction
The continued downturn of the Nigerian equities market so far this year has been attributed to different factors ranging from international factors (US FED’s QE Tapering) to local factors (Cash Reserve ratio (CRR) increase, Sansui’s suspension, possibility of a further tightening monetary policy environment etc.).
As the end of the first quarter of 2014 draws nearer and investors anticipate more corporate actions to drive the market, analysis of the share price performance of companies that have declared dividend above 2.5 percent yield shows that the respective counters have gained since the declaration day, with only NESTLE (2.24% yield) and PZ (0.52% yield) declining. If this trend continues, we expect that further attractive dividend declaration (particularly by the banks) will propel the market upward in the coming weeks. Suffice to say that initial reactions have been weak but subsequently, the stocks gain traction.
Also, as the unemployment rate falls and the US economy expands, the possibility that the US FED will further reduce its monthly asset purchases from $65 billion at the next FOMC meeting exist. Furthermore, Nigerian MPC is scheduled to meet in two weeks and will likely factor in the outcome of the FOMC meeting into their decision making process. Nonetheless, on the back of a pressured naira (which has declined by 2.64% to date, compared to the 2.66% depreciation in 2013), potential capital flight (which might result as foreign portfolio investors see their profits dwindle) and the upside risk to price stability, we expect the MPC to implement more tightening measures.
Amid uncertainties, fundamentals support position taking
Trading on the local bourse has been dominated by investors’ negative reactions to news flows dragging share prices below their perceived justified levels. However, this creates an avenue for value investors to make high returns on stocks trading significantly below their fundamentally justified levels.
Our assessment of companies with sound fundamentals shows that CUSTODYINS, MANSARD, VITAFOAM, TOTAL and HONYFLOUR fall within the category of stocks with expected high returns and attractive dividend yields with an average revenue and earnings growth of 22.21 percent and 14.34 percent, respectively, over the past three to five years.
We remain upbeat on the banking sector based on dividend expectations with an average expected year-end capital gain of 30.03 percent on banking stocks which are currently undervalued. We advise that investors cautiously seek bargain-hunting opportunities as well as long term upside potentials in the financial services sector as well as a few counters in other sectors. By our estimates, companies with sound fundamentals and expected attractive corporate actions should yield an average of 8.59 percent in dividends and 17.28 percent in earnings as against 4.13 percent and 7.29 percent, respectively, for the market.
Consumer stocks remain defensive despite negative sentiments
As much as we believe that the current market state presents low price entry opportunities for discerning investors, the need to stay defensive amid market volatility cannot be overemphasised.
Among 31 stocks with positive returns on the NSE, consumer goods sector has the highest number with five counters featuring on the list. The Industrial and Construction sectors also have a high number of stocks making the list when compared to the other sectors on the exchange.
While we advise that investors should take advantage of the current low prices, we also preach defensive investment strategy. Hence, we recommend balancing portfolio investment with counters from consumer and industrial goods sectors while taking position in low prices. We generally advise plugging into stocks with modest beta at this time of market uncertainty.
Technical perspective to the market: Need to appropriate market’s possible arbitrage opportunities in this supposed bear market
There is the need for investors’ capital to stay preserved from the current market volatility given the retinue of events that have shaped the market return. Our analysis of market trend January till date reveals that the bearish trend has been characterised by lower support levels with the recent trend showing an upward trend reversal of the downward slide. Hence, two support levels of short term and long term have been established in the last three months.
In our view, taking position at this time technically makes logical sense given that the current 14-day RSI trend shows an upward reversal is imminent; perhaps, in the coming week. Specifically, 36 stocks are currently trading exactly at their year low levels while 29 counters are trading at less than 5 percent variance to their year low prices implying that these counters present opportunities for near term upward swing in prices.
Notwithstanding the bearish market mood and cautious trading by most investors, there is a technical justification to take position for a medium term price appreciation given the current low market valuation.
Conclusion
On the whole, we believe the equities market still offers attractive upside. While expectation of FOMC and MPC decisions seem to be influencing investors’ decisions at the moment, the expected triggers from companies’ corporate actions will bode well for the market in the near term. Hence, we recommend position taking in stocks with low market pricing and attractive fundamentals, especially good corporate benefits.
