Optimism amidst Marginal Growth

Operators are upbeat that despite recording 0.09 per cent growth in the first half of 2018, the capital market will end the year higher, writes Goddy Egene

After the nation’s stock market recovered from a two-year decline to gain 42.3 per cent in 2017, many stakeholders remained bullish that the positive performance would be sustained in 2018. They hinged their bullish outlook on the fact that most of the factors that propelled the 2017 growth were still prevalent coupled with favourable macro-economic environment.

In line with the positive projections, the market began 2018 with an unprecedented rally that saw the Nigerian Stock Exchange (NSE) All-Share Index record a year-to-date (YtD) growth of 17.9 per cent in 14 days in January. Although the positive performance was sustained, profit-taking set and pared most of the gains recorded earlier. Consequently, the market ended the first quarter (Q1) with a growth of 8.5 per cent. However, the bears took control of the market in the second quarter (Q2) leading to a marginal gain of 0.09 per cent at the end of the first half(H1) of the year.

Early optimism
Operators had said the market would remain bullish in early part of 2018, given the positive developments in 2017. They added that many investors would take position ahead of positive results and dividends expected from companies for the year ended December 31, 2017.

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, alongside developments such as the increase of Nigeria’s weighting in Morgan Stanley Capital International (MSCI) Frontier Market Indexes and the introduction of the Investors’ and Exporters’ (I&E) FX window in April which increased the participation of investors in the equities market.
Then, they had projected that the factors would remain attractive to investors for most part of 2018 and had therefore expected a sustained bull market.

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.”

In the same vein, analysts at FSDH Merchant Bank had said: “The performance of 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 (NTBs).”
They said they therefore expected the factors that drove the equity market in 2017 to support the market rally in 2018.

“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,” FSDH said.
On their part, Cordros Capital Limited (CCL), another investment banking firm, said the 2018 economic outlook favour the equities market.

Although the firm made a strong case for equities upside potential, it also considered the number of possible risks that could trigger a bear market.
The Head, Research and Strategy, CCL, Christian Orajekwe, said the first scenario assumes that equities will return excess of 40 per cent in 2018.

“We have considered five possible triggers of the rally. The probability of the triggers is low to moderate. The possible triggers, in order of importance to Nigerian equities are: significantly favourable macroeconomic and political backdrop; strong corporate earnings growth; strong portfolio inflows; mergers and acquisition (M&A) activities; and strong moderation of fixed income and treasury yields,” he said.

The second scenario assumes about 10 per cent to 15per cent equities return in 2018.
“We have considered four possible triggers of the rally. The probability of the triggers is moderate to high. The possible triggers, in order of importance to Nigerian equities, are: moderate improvement in the macroeconomic environment, as widely envisaged; stable to modest corporate earnings growth; modest improvement in portfolio inflows over 2017; and marginal moderation of fixed income and treasury yields,” Orajekwe added.

According to him, the last scenario assumes equities will deliver between 20per cent to 25per cent negative return in 2018.
“We have considered four possible triggers of the sell-off. The probability of the triggers is very low to moderate. The possible triggers, in order of importance to Nigerian equities, are: macroeconomic and political shocks; poor corporate earnings; MSCI delists Nigeria from its emerging market index; and foreign portfolio investors flee naira assets,” he noted, adding: “Though our projections are not static and as scenarios unfold, we will continue to adjust our projections.”

CCL said the downside risks to equities market return in 2018 will be more weighted in the second half (H2). This will be more pronounced in the fourth-quarter (Q4) when it is expected that most investors (particularly contestants during elections) will begin to sell down equities for election spend.

Enter the bears
Although it was expected that Q1 corporate results of companies would lift the market in the months that opened the second quarter (Q2), the bears remained in firm control, reducing the gain for the year to 7.91 per cent at the end of April. And by the close trading at the end of Q2, the market has suffered a decline of 7.7 per cent. However, because of the Q1 gains, the H1 performance recorded a marginal growth.

But the negative sentiments that prevailed in Q2 did not come as a surprise to many operators and analysts.
According to them, they had expected profit taking by investors in most stocks that had been overbought in the beginning of year. Also, analysts said the bear run was fuelled by the exit of foreign from emerging and frontier markets and political uncertainties in the country.

The foreign investors were said to be moving their funds into Western countries, especially United States, following rate hike. Analysts equally cited the panic created by the outcome of the ruling All Progressives Congress (APC) primaries as another factor that led to cautious trading in the market.
At the end of the H1, the ASI stood at 38,278.55, down from a peak of 45,092.83 on January 19, 2018, while market capitalisation fell to N13.866 trillion, compared with a peak of N16.154 trillion in the same date.

Operators’ Optimism
Despite the low performance in H1, operators and analysts are upbeat that the market will still close the year with significant growth. Although they said developments in the political environment would play a major role in the second part of the year, they projected a positive close for the market.

While Vetiva Research cut its economic growth forecast for 2018 to 1.9 per cent from 2.4 per cent, it said the equities market would grow by five per cent. Vetiva Research expects pre-election activities to steer the economic environment for the rest of the year, with election spending boosting the economy but also inducing greater inflationary pressure.

Chief Economist of Vetiva Capital, Michael Famoroti noted that there are uncertain times ahead.
“Impending elections are also likely to induce greater economic uncertainty and distract policy and governance at the tail-end of the year, neither of which is positive for confidence or investment,” Famoroti said.
Speaking on the fixed income market, he said that the late budget passage, pre-election spending, and food price pressure could induce higher inflation at year-end.

“Despite an improving macroeconomic environment and a semblance of policy stability, Nigeria’s financial markets would likely be steered by the fallout of electoral activities and rising global interest rates,” he said.
However, the firm projected a positive outlook for the Nigerian equities market the various pronounced impact the coming general elections would have on the economy notwithstanding.

“Comparable multiples with peers suggest the Nigerian equity market remains undervalued. We maintain a strongly positive post-election outlook on Nigerian equities,” it said.
Vetiva Research also revisited its top “10 High Conviction Stocks” presented at the beginning of the year, which represent key stocks on the Nigerian Stock Exchange (NSE) that are expected to outperform the market by year-end.

Olabode said: “These high conviction stocks have so far outperformed the broad market index by 1.5 per cent on a market cap-weighted basis and 7.0 per cent in simple average returns, and maintain these stocks as key picks for 2018.”

In the opinion of the Head, Equities, Head, FBNQuest Capital Bunmi Asaolu, the market would recover the lost ground and end the year with a minimum growth of 10 per cent.
According to him, the macro economic outlook is still supportive with all prices remaining firm.

“Our view is that the macro outlook is still supportive, with oil prices remaining firm, and that this should offset potential uncertainty stemming from political risk going into H2 2018. Although we do not expect consensus earnings estimates to see significant upwards revisions through the rest of the year, valuations are yet to fully capture earnings outlook expectations, especially among the Tier 1 banks. As such, we expect the index to recover lost ground, with a minimum of 10 per cent gain by the end of the year,” Asaolu said.