The equities market in most parts of February sustained a depressed mood with Return to Date (RtD) at -4.28 percent. This is not unexpected given investors’ reaction to unpleasant news flow on QE Tapering and increased Cash Reserve Ratio (CRR) that spilled over from January. The suspension of the CBN governor, Sanusi Lamido Sanusi, also trailed these events, thus amplifying the uncertainties in the market.
The equities market did not react in isolation to the news; yields on fixed income instruments trended upwards during the month and pressures mounted on the naira, which went as high as N169/USD upon the suspension of the CBN governor.
Ripples in the equity market
2014 has not been very pleasant and has been dotted with spikes of volatility, placing the market in the red on the back of several shocks such as the further hike in CRR from 50 percent to 75 percent. No sooner had the market begun to recover than it was further depressed by the news of the suspension of the CBN governor, thus losing 1.47 percent on the announcement day and 1.34 percent the following day.
FX under intense pressure in February
Naira came under intense pressure in February due to events in the global economy (e.g. QE tapering) that prompted currency sell offs in the emerging markets and mounted considerable pressure on the naira (with a 0.37% depreciation) within the first and second weeks of the month. This was compounded with news on the possibility of a 100 percent CRR on public sector deposit, which also pushed the depreciation further.
Towards the end of the month, the shock of Sanusi’s suspension drove the interbank exchange rate to a 52-week high of N169/USD from N162.6/USD at the beginning of the week, a 3.94 percent depreciation. The CBN interventions in the following week however helped push back the naira to N164.75/USD.
Sanusi’s suspension raised yields in the fixed income market
In the fixed income market, yields trended upward, especially in trading days post-Sanusi’s suspension. The selling pressure was intense in the fixed income market as bond prices dipped, which intuitively raised yields on the instruments. Yields on T-Bills on all maturities from the beginning of the year to pre-suspension averaged 12.55 percent vs. post-suspension average yield of 13.53 percent. Yields in the bond market also followed suit as the average yield increased by 8bps from 12.92 percent to peg at 13 percent. In the NIBOR market, rates also trended north as average rate increased to 12.19 percent vs. 11.97 percent pre-suspension.
Despite global risks, Nigeria remains attractive
Due to expectations of sustained QE tapering by the United States, financial markets in emerging and frontier economies have experienced reduced inflows as foreign investors from developed markets continue to readjust their portfolios to benefit from higher returns in their markets and mitigate their exchange rate risks.
In reaction to the recent volatility in emerging markets (EMEs), central banks in some of these economies such as Ghana, Turkey, and India raised their benchmark policy rates. There are also indications that the United States may increase interest rates in the near term, which would further trigger funds repatriation to US markets.
Nevertheless, Nigeria, with a market PE of 13.73x, relatively stable foreign exchange rate, and attractive yield environment (12.96% average bond yield) remains a compelling investment destination. Hence, barring any further shock that may counter the relative calm experienced in the market, we think the negative sentiments would retract for some bullish trading driven by impressive results from quoted companies, albeit marginal.
Depletion of foreign reserves may trigger devaluation of the naira
External reserves dropped by $2.44 billion in 2 months from $42.85 billion on December 31, 2013, to $40.41 billion on February 26, 2014. CBN has raised concerns about the continued depletion of Nigeria’s foreign reserves and excess crude account (ECA). The depletion threatens sustained intervention in the foreign exchange market by the CBN.
Following the suspension of the CBN governor, foreign investors’ concerns about the autonomy of the CBN pushed the naira to a record low (N169/USD). Naira devaluation appears probable but it is unlikely in the interim as the acting CBN governor, Sarah Alade has assured stakeholders of continued efforts to defend and ensure stability of the naira.
Investors’ sentiments to shift as earnings season approaches
While past events and news flow may still affect the market going forward, we believe attractive 2013FY numbers for some sectors remains the major catalyst for positive returns. With the earnings season fast approaching, companies with good dividend payment history will likely enjoy price appreciation as investors’ take position in anticipation.
Annual average profit of the banking sector is estimated to be 7 percent higher in 2013. Insurance sector is estimated to grow 2013FY profits by an average of 16.74 percent for the major operators. 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 in March as investors take positions ahead of corporate benefit announcements. Companies with impressive 2013FY growth in top- and bottom-line figures will also enjoy investors’ patronage.
