Despite earlier expectations that more companies’ financial scorecards and possible corporate actions will lure investors into buying more stocks, recent uncertainty over possible decisions of the Monetary Policy Committee (MPC) is causing investors to stay on the sideline.
As the MPC next week holds its first meeting without Sanusi Lamido Sanusi, the suspended governor of Central Bank of Nigeria (CBN), concerns over possible surprise at the meeting is subduing recovery in the stock market.
Despite banks’ earnings release, market sentiment has remained weak, as attractive yields on fixed income securities quench local investors’ appetite for stocks.
All eyes are on the MPC meeting because in the past one month, the weakening external reserve as Sarah Alade led-CBN battles to save the naira is heightening naira devaluation risk.
In addition, not a few market analysts foresee no surprises at this meeting beyond the 100 percent Cash Reserve Ratio (CRR) on public sector deposits.
UBA Capital analysts said: “The MPC may give forward guidance on FX management, as we expect a mark-to-market devaluation at the May session; likely increase in the managed peg to N165/$±3 percent. Notably, inflation is broadly within target at 7.7 percent in February (versus our outlook of 7.9%), albeit Naira devaluation may pressure inflation rate to 10.2 percent.”
“Notably, market defied the attractive dividend yields and appreciable earnings scorecards of Zenith Bank and GTBank, thus justifying our view that market is yet to bottom, as foreign investors may remain on the sell-side pending clarity on naira devaluation risk. Albeit, the bearish trend in the equity market presents bargain hunting opportunity for local value investors, with long-term investment horizon,” the market analysts at UBA Capital further said.
On the international front, the US Federal Open Market Committee (FOMC) meets later this week in Washington and analysts expect they will announce a third $10 billion reduction in the Fed’s monthly asset purchases.
“As monetary conditions tighten in the US and elsewhere, so there will be a retreat by offshore portfolio investors from emerging and frontier markets,” said analysts at FBN Capital.
Amid negative take-off this week, yield at the Nigerian Stock Exchange remained in the negative territory last week at -7.64 percent year-to-date (YtD), while on a month-to-date (MtD), the market lost 3.51 percent.
FBN Capital analysts said charted the ytd performance of the three leading stock markets in sub-Saharan Africa (SSA). “What we find is that Lagos, having been by far the strongest of the three in 2013, with a rise of 47.2 percent in local currency terms, has become the laggard. Nairobi and Jo’burg are broadly flat ytd, having achieved gains of 19.2 percent and 17.8 percent, respectively, last year. We identify what we term reverse catch-up in the case of Lagos. The suspension of the CBN governor on 20 February did not help sentiment although we should add that the sell-off had already begun. All three markets have been vulnerable to tapering by the US Federal Reserve,” the analysts noted.
Though they further noted that, “Nigeria will escape the worst in this process, and anticipate its gains, equivalent to almost six percentage points in its weighting, from the rebalancing of the MSCI Frontier index in May this year.”
Not a few market analysts believe that the news four weeks ago on suspension of Sanusi amplified panic in the stock market, a development that further depressed investors’ confidence, dragging the All Share Index (ASI) below 40,000 points (its psychological level).
Despite this development, market analysts at Meristem Securities Limited believe that Nigerian equities are cheap relative to its peers. “Current market valuation in terms of Price Earnings (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 emerging market equities, further buttressing the attractiveness of the equities market.”
Also looking at the Nigerian stock market, Morgan Capital analysts said the exit of foreign investment portfolio managers was the major catalyst for this decline in the value of the market.
“We have seen some profit-taking from the Foreign Portfolio Investors (FPIs) whose portfolios have seen good returns, especially given the strong close of the market in 2013 (47%). The heightened risk in the political climate as the general election draws near and the unpredictable monetary policy regime following the suspension of the CBN governor are responsible for the bearish sentiment in the market,” according to Morgan Capital analysts.
Accordingly, the market analysts said they expect local investors (especially PFA’s and other local institutional investors) who have the capacity to price the local risks better to become more active in the market and mop up some of the shares of companies that have opened up good entry points.
Iheanyi Nwachukwu
