In spite of concerns about Nigeria’s political, currency and interest rate risks, the projections for the nation’s capital market are largely positive for this year.
Though, many are doubtful about the possibility of attaining in this year, the level of returns achieved in the stock market in the past two years.
Not a few stakeholders within the stock market still believe that the level of returns that will be achieved in the Nigerian stock market is still a function of investor demand for listed equities.
They premise their views on account that demand and supply factors still have effect on stocks pricing.
Despite this week’s frail take-off of stock trading at Custom Street, while many investors held-back their investible funds ahead of Monetary Policy Committee (MPC) pronouncement on rates, the Nigerian stock market had returned 1.02 percent.
Early this week, many investors remained skeptical in channelling funds to equities despite analysts’ consensus that MPC would keep Monetary Policy Rate (MPR) unchanged.
The MPC rose from its first meeting of the year with the decision to retain the MPR at 12 percent, increased Cash Reserve Ratio (CRR) from 50 percent to 75 percent, and held liquidity ratio at 30 percent.
Amid investors approach to possible risks around the market, particularly on impact of recent increase by 25 percent of CRR on banks’ earnings, analysts at Meristem Securities believe that “with recovery in the global economy in sight, modest equities valuation, sustained attractiveness of the domestic economy, though, tainted with pockets of domestic political concerns, we expect positive returns in the equities market in 2014.
“Given our outlook for 2014, in light of the direction of the domestic economic macros as well as the expected return on equities and fixed income market, we advocate an actively dynamic portfolio strategy modelled around specific timing and asset classes for optimised return in 2014.”
Also, analysts at CardinalStone are of the view that with the record gains seen in the equity market over the past two years, approximately 35 percent and 47 percent in 2012 and 2013, respectively, –“we expect a slow-down in 2014.”
According to them, “our expected return on Nigerian equities in 2014 is about 10 percent. We expect fixed income yields to rise with modest returns in the low single digits and also expect shorter tenored treasuries to continue to see more interest, as investors seek to minimise duration risk.”
On stocks in their top picks, the analysts simply said: “Though we project a moderation in equity market return from the record five-year high of 2013, we remain bullish on the financial services stocks with United Bank for Africa plc, Ecobank Transnational Incorporated plc, FCMB Group plc, and Custodian & Allied plc, as some of our top picks.
“We highlight the fact that a few of the stocks in the consumer goods sector (example Nestle Nigeria plc, Nigerian Breweries plc, and Cadbury Nigeria plc would likely continue to see strong investor interest due to illiquidity premium and foreign ownership structure,” CardinalStone analysts noted in their report titled ‘Nigerian economy and financial market 2014 outlook – reversal or renaissance?’
Recently, in the review of 2013 market performance and outlook for this year, Oscar Onyema-led management of the Nigerian Stock Exchange (NSE) noted some factors that will shape the market this year. The NSE believes that “as countries in developed markets emerge from their economic troubles, the Nigerian capital market will be impacted by shifts in investor demand.”
Onyema noted that achieving competitiveness and enhancing the NSE’s value proposition were important to Nigerian bourse success in 2014, adding that “however, safe-guarding against potential shocks, both local and international, and maintaining a high level of attractiveness with a strong regulatory framework, are equally critical to the NSE.
“While the NSE’s focus from 2011 to 2013 has been on restructuring, improving technology, product development, and advocacy for changes to policy, in 2014, we will shift gear to drive innovations centred on increasing global visibility into the Nigerian capital market, developing a larger footprint on the continent, and ultimately, targeting emerging market status. We believe that these steps are critical to NSE becoming the foremost securities exchange on the continent.”
Onyema added: “We expect Nigeria to be a key beneficiary of the MSCI 2013 annual market classification review, which will see Qatar and UAE (together accounting for 30%), transition from the MSCI Frontier Markets Index to the MSCI Emerging Markets Index. Cautiously, we will watch for the effects as Nigeria’s weight in the MSCI Frontier Markets Index shifts from the current 13.8percent to 19.7percent, making it the second largest market in the index.”
On the flipside, the NSE believes that emerging markets are more vulnerable to market sentiment than they were 5-10 years ago, and Nigeria is not immune to the negative implications of higher yields, globally. “The decision by the US Federal Reserve to start cutting its monthly bond purchases, initially to $75 billion from $85 billion, is expected to have a residual effect on the Nigerian equity, bond and currency markets later in 2014, affecting foreign portfolio investment (FPI) and the strength of the naira against the dollar.
“On the bond side, the heightened appetite for sovereign debt is expected to resurface in 2014, as the Federal Government seeks to reduce its domestic debt, flattening the bond market for states. However, as Nigerian government bonds have historically offered high yields, this will remain an attraction for investors seeking those high returns. Meanwhile, we anticipate that the corporate debt market would continue to struggle as the cost of issuing corporate debt (long term) remains higher than accessing short-term debt from the banks,” Onyema SAId.
In their views on performance of the stock market this week, Morgan Capital analysts said the positive market sentiment in the market was supported by the expectation that most companies would generally turn out good performances when the financial year 2013 earnings season came through.
“This expectation has given impetus to the possibility that these companies will reward investors with good dividend payouts. Going into the new trading week, we expect positive investor sentiments to pervade the market and sustain another week of gains as we approach the last earnings season for the 2013 fiscal year,” these analysts said.
Despite the negative start-off this week, market watchers at Access Bank plc still believe that “this week the nation’s equities market may sustain the northward trend on anticipated positive year-end performance of financial services companies as well as the introduction of key initiatives aimed at propelling the local bourse into the emerging markets.”
Also, taking a look at the market this week, Cowry Asset Management analysts said they expect “sustenance of bargain hunting activities amid pockets of profiteering.”
By: Iheanyi Nwachukwu
