The recovery of Nigeria’s equities market in 2017 was expected after three consecutive years of decline. While the market fell 16.14 per cent in 2014 and 17.3 per cent in 2015, it closed 6.17 per cent lower in 2016. After those three years of decline, a recovery was expected in 2017. The market eventually rebounded and posted 42.3 per cent growth last year.

Operators had envisaged that the bullish trend recorded in 2017 would continue into 2018. However, nobody had anticipated the unprecedented level of rally recorded in the last eight days. The market has appreciated by 12.6 per cent in eight days as high demand for bellwether stocks lifted the market to a new high.

The Nigerian Stock Exchange All-Share Index rose from 38,243.19 at the end of 2017 to 43,041.54 as at Thursday. Similarly, market capitalisation added N1.71 trillion to close at a new high of N15.317 trillion since 2008.

 Record Gain

The early year market rally has been attributed to the activities of bargain hunters, who are taking position ahead of positive results from companies for the year ended December 31, 2017. The Nigerian stock market had closed 2017 among the top best performers. Specifically, 67 stocks recorded gains, while 38 depreciated. Some of the stocks appreciated above 100 per cent.  The highest price gainer for the year was Dangote Sugar Refinery Plc that posted a gain of 227 per cent.

International Breweries Plc, Fidelity Bank Plc, Fidson Healthcare Plc, and Dangote Flour Mills Plc, appreciated by 194.5 per cent, 192.8 per cent, 189 per cent, and 185 per cent, respectively.

Assessment

Market operators and analysts attributed the positive performance to some factors.

For instance, analysts at Meristem Securities Limited said positive sentiments dominated the Nigerian equities market in 2017 as investor confidence was restored following release of impressive financial scorecards. They also acknowledged developments such as the increase of Nigeria’s weighting in Morgan Stanley Capital International Frontier Market Indexes, and the introduction of the Investors’ and Exporters’ FX window in April, which increased the participation of investors in the equities market.

Similarly, analysts at FSDH Merchant Bank said, “The  performance of the market in 2017 was driven by: the increase in the price of crude oil; introduction of the Investors’ and Exporters’ (I &E) foreign exchange window leading to stability in the foreign exchange market; improved corporate earnings and the drop in the yields on the Nigerian Treasury Bills.”

Looking ahead, operators and analysts had projected another bull run for the market in 2018. According to MSL, “Given that we expect the Nigerian economy to maintain its steady growth, we do not expect the market to deviate from its current trend; hence, we opine that this positive momentum will be sustained in 2018, albeit at a slower pace on the back of the high base effect in 2017.”

Similarly, FSDH said they expected the factors that drove the equity market in 2017 to support the market rally in 2018.

FSDH said, “We observed a strong correlation between the historical movements in the NSE ASI and the crude oil price (Bonny Light). The current consensus is that the average price of crude oil will be marginally higher in 2018 than 2017. The inflation rate should decline further in 2018. FSDH believes the expected drop in the equity market in first quarter (Q1) 2018 is an opportunity for strategic investment in the market ahead of the expected rally in second quarter (Q2). The following sectors should perform well in 2018: banking; building materials; consumer goods and agriculture.”

In  their own assessment,  analysts at WSTC  Financial Services Limited say the equities market is expected to be driven by liquidity in the FX market, improving economic activities, impressive corporate performance and softer yields on fixed income securities in first half (H1) 2018.

In a similar vein, Vetiva Capital Limited has said equities will have the upper hand in comparison to the fixed income space. According to the research analysts from the investment banking firm, “Despite the 2017 equity market rally driven by a partial liberalisation of the country’s exchange rate regime, the Nigerian Stock Exchange remains relatively undervalued.” They have projected further gains for the equities market in 2018, with an estimated full year return of between 15 per cent and 20 per cent.

Vetiva also presented its “10 High Conviction Stocks” for 2018, representing key counters on the NSE that present strong fundamentals and are expected to outperform the market in the year.  With their “10 High Conviction Stocks” outperforming the board market return by 15 per cent and 16 per cent in 2016 and 2017, respectively, Vetiva highlighted Tier II banking stocks, among others, as key recommendations for 2018.

On the broader economy, Head of Vetiva Research, Olalekan Olabode, said, “As the Nigerian economy continues its recovery, possible political tension ahead of 2019 elections could cap gains from the wider economy. The second half of 2018 is likely to be blurred by possible political and social volatilities, whilst electioneering could potentially distract policy-makers and delay investment. The silver lining can be found in Nigeria’s more mature democracy in terms of credibility and transition, ensuring that the economy progresses relatively unencumbered.”

Also speaking, Chief Economist of Vetiva Capital, Michael Famoroti, stressed the need for brave policy action to shift growth beyond first gear. According to Famoroti, amid a more accommodative global environment, Nigeria should have confidence in boldly pursuing its internal growth agenda.

He stated, “Internally, the most notable improvement would be the full recovery of oil production, currently around 2.0 mb/d, to a level close to, but still short of the 2018 budget benchmark of 2.3 mb/d (forecast: 2.1 mb/d). From this, we can expect to see further consolidation in federal government revenues and the foreign exchange (FX) market.”

The analysts cited fast moving consumer goods, industry goods, banking, and construction as the sectors that will deliver significant returns to investors in 2018. They said, “FMCG, industrial goods, banking, construction, and upstream oil and gas are poised to benefit most. Regulation constitutes a key risk to the downstream oil and gas industry. We expect a modest contraction in net interest margin in the banking industry in H1 2018.”

The inclusion of banking sector as one of the sectors that will perform well in 2018 is not surprising considering its performance in 2017. The banking sector, measured by the NSE Banking Index, grew by 73.3 per cent to lead other sectoral indices.

Fidelity Bank (+192.86 per cent) topped the gainers’ chart in the banking sector while recording the third highest return in the entire market. On its trail were Stnabic IBTC Holdings Plc (+176.67 per cent), FBN Holding Plc (+162.69 per cent), UBA (+128.89 per cent), and Access Bank Plc (78.02 per cent).

On the other hand, Jaiz Bank , Wema Bank Plc  and Unity Bank Plc were the only counters with negative annual returns as their share price recorded respective declines of 49.60 per cent, 3.70 per cent and 3.64 per cent, in that order.

Analysts at MSL said active investor participation was seen in the sector, as investors reacted to the inflow of favourable news within the space in a bid to position adequately for short-term and long-term profits. They said, “The sector’s performance was largely anchored by investors’ reaction towards the financial performance and corporate benefits of sector companies. We also note the impact of portfolio rebalancing activities and the year-end rally on the sector, as this drove most counters to their year-highs. In the coming year, we envisage increased participation within the space as we note that the sector is highly suited for speculative trading as well as long-term investments.”

On the financial performance of companies in the sector in 2018, they envisage a moderation in profit growth on the back of a decline in asset yield.

“Therefore, even though we expect a positive return at the end of the year, we do not envisage gains as sizeable as that recorded in 2017,” MSL analysts said.




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