The cheapest valuations among frontier and emerging-market peers are failing to lure investors to Nigerian stocks amid concerns that pre-election uncertainty, slowing economic growth and increasing security risks will damage the prospects for earnings.
The Nigeria Stock Exchange (NSE) – All Share Index (ASI) price-earnings ratio of 13.59 x, is lower than the P/E ratio for the MSCI Frontier Markets (FM) Index of 16.74x, as well as that of Ghanaian stocks with P/E of 54.5x, South Africa 19.57x, and Kenya 14.56x.
In contrast, the more expensive bourses have outperformed Nigerian equities, with South African stocks up 11.53 percent year to date (July 14), Kenyan stock up 10.59 percent, and Ghanaian stocks up 10.58 percent, compared with the NSE-ASI which has risen 3.64 percent.
The MSCI FM index is up 17.24 percent in the same time period.
“Nigerian equities suggest under-performance, relative peers when compared with other emerging, frontier and African markets. This is expected on pessimism by investors due to security threats which remain on the front burner, coupled with the political risks as the 2015 general election draws closer.
“All these factors will remain a major drag to the market in the second half of 2014,” said Kayode Omosebi, a research analyst at UBA Capital Plc, in response to questions.
The National Bureau of Statistics (NBS), revised Nigeria’s GDP growth rates 2 percentage points lower last week, after updated data on economic output was released.
Nigeria’s real GDP growth was estimated at 5.5 percent in 2013 versus 6.9 percent under the old GDP series and from 4.2 percent in 2012 versus 6.6 percent in the old data.
“Nigeria has not been growing at around 7 percent and nearly as fast as China – as previous growth data suggested. Instead it has been growing at very similar rates to those seen in Kenya,” said Charles Robertson, global chief economist at Renaissance Capital, in a July 14 research note.
“This is encouraging for anyone who has been long in Kenyan Stocks, such as Safaricom, Equity Bank and KCB – in preference to taking a long position in Nigeria, ahead of the presidential elections likely in early 2015.”
Foreign outflows of funds which reached N50.59 billion ($310 million) last month have outpaced inflows for each of the five months between January and May this year, according to data from the bourse.
Foreign transactions on Nigeria’s $86.5 billion stock market decreased to 45.56 percent in May, from 75.25 percent in April, the exchange said in its most recent report on trading activities.
Stocks are struggling despite a benign inflation environment (8 percent year on year), relative outperformance of the naira compared to peers and the country’s $503 billion economy being the largest on the continent.
Recent data suggests fund managers have been rotating into government bonds and treasury bills this year, and selling riskier assets, helping to stem the slide in the naira and CBN FX reserves, which have risen by $1 billion in the past month.
While investors are not willing to place large bets on Nigerian stocks before elections, due next February, Omosebi says equities will offer solid returns in the medium to long term, as fundamentals remain sound.
“Most companies have the potential to deliver good earnings driven by government policies and reforms, energy and infrastructure deficit, rising middle class, increasing consumer spending, and burgeoning demand, among others,” Omosebi said.
PATRICK ATUANYA
