‘We may see market return to accumulation phase in Q4’

Abigail Alabi, team lead, Equities Research, Vetiva Capital Management Limited shares insights on Nigeria’s 2025 market outlook, where she highlights sustained disinflation, cautious monetary policy, exchange rate stability and a positive equities market as key themes for the year, writes Iheanyi Nwachukwu.

On the economic front, there appears to be some positives with the recent and continuous decline in inflation, giving rise to some level of investor optimism. Considering the structural challenges, how sustainable is this trend, and what should we expect for the rest of 2025?

Yes, we have seen a notable shift in the inflation narrative this year. Notably, headline inflation declined to 21.88 percent year-on-year (y/y) in July 2025, representing a 34bps drop from June. This was largely driven by base effects, a stable exchange rate, and moderating energy prices, particularly for Premium Motor Spirit (PMS), which helped ease cost pressures.

That said, underlying inflationary pressures remain evident. Month-on-month inflation, including core and food inflation, has trended upward, partly due to seasonal factors such as the rainy season and heightened insecurity in food-producing regions, which drove food prices higher.

Looking ahead, we expect the disinflation trend to continue, supported by the CPI rebasing carried out in 2024 and a generally favourable macroeconomic backdrop. However, downside risks persist. Global tensions remain unresolved and could push oil prices higher, potentially triggering increases in domestic PMS prices. Likewise, continued insecurity in agricultural areas could disrupt food production and sustain food inflation pressures. These risks could slow the pace of disinflation in the coming months.

In light of the ongoing decline in inflation, should we anticipate further moderation in interest rates in the coming months?

The Central Bank of Nigeria has maintained the Monetary Policy Rate (MPR) at 27.5 percent since November 2024. This cautious stance is driven by a mix of domestic and global considerations.

Domestically, while GDP grew by 3.13 percent y/y in Q1 2025, the pace was slower compared to previous quarters, reflecting broad moderation across both oil and non-oil sectors. Although headline inflation has been easing, month-on-month numbers indicate persistent inflationary pressures.

Furthermore, global trade and geopolitical tensions have kept central banks in emerging and developed markets in a wait-and-see mode. These uncertainties were a key factor in the CBN’s decision to hold rates steady.

Looking ahead, the path of inflation will remain the primary consideration. Unless we see a clear, sustained downward trend in key CPI components, the MPC may continue its cautious approach. However, a stronger disinflationary trend would give the CBN room to begin easing rates gradually.

The exchange rate has remained relatively stable so far this year. From a mid- to long-term perspective, is this stability sustainable, and what are the key risks to watch?

The naira was relatively stable in H1 2025, supported by tight monetary policy, structural reforms, and the CBN’s interventions in the foreign exchange market. Transparency has improved, reducing arbitrage and restoring confidence in the official window. These reforms, coupled with improved dollar liquidity, have created a more resilient FX market.

That said, sustaining this stability over the medium to long term will require consistent foreign capital inflows and stronger net oil export revenues. The key risks to watch include any reversal in reform momentum, external shocks to oil prices, or domestic policy shifts that could undermine investor confidence. Without continued commitment to reform and macroeconomic discipline, the current exchange rate stability may be difficult to sustain.

The equities market delivered a 36.30 percent return as of August 2025, with the Consumer Goods sector leading the rally. What were the key drivers of this performance, and should investors expect a similar or stronger market performance in subsequent quarters?

Yes, the Nigerian equities market delivered a strong 36.30 percent return as of August 2025, with the Consumer Goods sector notably leading the charge. This performance was driven by the sector’s ability to implement price increases, helping to cushion the effects of rising input costs and currency depreciation. These pricing strategies supported top-line growth in Q1’25, which in turn bolstered investor confidence and share prices.

In addition, improved transparency in the foreign exchange market and a gradual stabilisation of the naira created a more predictable operating environment, encouraging increased domestic participation. Furthermore, the disinflationary trend, reflected in year-on-year declines in headline inflation, signalled a recovering economy and supported broader investor optimism.

Looking ahead to the rest of the year, earnings announcements and dividend declarations by bellwether companies are expected to sustain momentum in the early part of Q3.

Furthermore, we believe that if the disinflation trend persists, it could lead to a further moderation in interest rates, following the recent decline in fixed income yields. As a result, investors may tilt further towards equities in search of better returns. On the other hand, while a full-year positive return remains likely, growth could moderate in the latter part of Q3’25 as investors take profits in stocks that have rallied significantly. Nonetheless, we may see the market return to the accumulation phase in Q4’25, where investors cherry-pick sound stocks trading at a discount.

We have historically seen a notable gap between domestic and foreign investor participation. Has market participation evolved in 2025 in terms of a narrowing gap, and what is the outlook for 2025?

Market participation dynamics have evolved in 2025, particularly in the longstanding dominance of domestic investors. While domestic participation still accounts for the majority of trades, the gap with foreign investors is narrowing.

This shift has been supported by improved foreign exchange liquidity stemming from ongoing reforms, which have made it easier for foreign investors to repatriate funds. Renewed confidence in the equities market, along with a favourable trade environment and strong market performance, has further supported foreign investor re-entry. As a result, foreign participation has grown from about 10 percent in H1 2023 to nearly 30 percent in H1 2025.

For the remainder of the year, the trajectory of foreign participation will hinge on the continuity of FX market reforms and sustained liquidity improvements. Foreign investors are expected to remain cautious, closely observing policy consistency and macroeconomic stability. While foreign activity may not surpass domestic participation in the near term, the narrowing trend is likely to continue, provided the economic and policy environment remains supportive.

For specific opportunities, which sectors are expected to offer the most attractive upside for investors in the latter part of the year?

The Consumer Goods sector, which outperformed in H1 2025, remains well-positioned to sustain its momentum. Many FMCG players have successfully navigated cost pressures and currency volatility through backwards integration and improved local sourcing. In addition, wage adjustments and improved food supply are expected to support consumer demand in H2, further boosting sector growth.

The Banking sector is another area of interest, given its ability to benefit from elevated interest rates. Banks are likely to report stronger net interest margins, which could translate into improved earnings and attractive dividend payouts.

The Agriculture sector also holds promise. Strong global demand for Nigerian agricultural products and rising commodity prices are driving revenues for agribusinesses. While this has inflationary implications locally, it enhances profitability prospects for listed players in the sector.

Given expectations for moderating interest rates, what investment strategy would you recommend for H2 2025? Should investors consider increasing their allocation to equities?

With monetary policy expected to ease in the coming months, equities are becoming increasingly attractive. Historically, declining interest rates support equities, especially growth and dividend-paying stocks.

Inflation is easing, fixed income yields are declining, and monetary tightening appears to have peaked. These factors make a strong case for portfolio rebalancing in favour of equities.

Sectors that are structurally sound and positioned for recovery, such as banking, agriculture, and consumer goods, present attractive opportunities. Defensive sectors like the telecoms also remain crucial in stock selection. As such, a measured increase in equity allocations is advisable.

On the other hand, despite declining yields in the primary fixed income market, long-dated government securities still offer attractive yields. That said, long-term investors may consider locking in these rates ahead of further potential declines in interest rates.