Stocks: Choppy H1, no better H2

Take advantage of dips in stock prices to position ahead of buying activities in H2 Non-banking stocks to sustain trade in the tight rage; market to largely remain in a lull with spurts of bullish sentiment

THE NIGERIAN DOMESTIC EQUITIES market is projected to sustain a tight trading range in the second half of 2021...

THE NIGE RIAN DOMES TIC EQUITIES market is projected to sustain a tight trading range in the second half of 2021 as equities are expected to remain comfortable with yields in the fixed income market while domestic investors remain content with yield offerings and foreign investors stay wary of the sustainability of economic recovery, given weak policy framework and fragile fiscal situation, according to market analysts.

It was a choppy first half for the market as investors’ interest waned, creating apathy for equities. Unsurprisingly, the benchmark index shed 5.9 percent year to date at the close of June 2021 resulting from the bearish sentiment on the local bourse, which emanated largely from persistent sell-offs across the banking and industrial goods sectoral indices that then dipped 6.9 percent and 8.1 percent year to date, respectively. In the same vein, losses were suffered in the consumer goods index which closed lower by a marginal 0.3 percent year to date by the close of the first six months in 2021. On the flip side, the rebound in oil prices rejuvenated sentiments in oil & gas stocks, as well as, insurance stocks which saw their representative indices surge 39.1 percent and 5.2 percent year to date, respectively.

Drivers of low investor appetite during H1?

A close look at the key drivers of the weak appetite for Nigerian equities shows that the negative correlation between the fixed-income yields and the equities market was extended into the first half of the year. Thus, an upward reversal in the yield environment triggered selloffs while limiting new fund flows into Nigerian equities. In addition, negative economic perception and FX market instability ensured foreign investors’ appetite for Nigerian equities remained weak, limiting fresh foreign investor flows into Nigerian equities.

To give some perspective, according to data from the Nigerian Exchange Group, foreign investment in Nigerian equities printed at a net outflow of N15.9 billion between January and May 2021. Noteworthy to mention, in line with market analysts’ outlook, adopting a momentum-based strategy in investing in the equities market appeared to produce results despite the broad bearish sentiments, as the ASI gained in January and April 2021, during these key months associated with earnings announcements by companies.

Meanwhile, foreign investor participation in the Nigerian equities market declined noticeably in the first half of 2021. According to the stock exchange’s data for January to May 2021, foreign investor participation in the equities market printed at an all-time year to date low of 21.3 percent, compared to 38.9 percent between January and May 2020. Clearly, foreign investor interest in Nigerian equities has declined steadily over the past few years, hitting rock bottom this year following the loss of confidence in the FX market framework, as well as negative business and policy environment perception, exacerbated by the pandemic. Noteworthy to highlight, foreign investor participation in naira terms declined 41.7 percent year on year to N198.5 billion as at the end of May-2021.

Will H2 ‘21 outcome meet analysts’ expectations?

Following the weakened sentiments which pervaded the first half of the trading year, market analysts at FSDH Capital Research in a research outlook note provide some insights into factors that are expected to drive the performance of the Nigerian equities market. They also make interesting calls with regards to strategies to approach investment in the equities market in the next half of the year.

“Notwithstanding the inherent value in Nigerian equities, we do not expect a significant rally in Nigerian equities in the second part of 2021. First, we expect domestic investors to stay on the sidelines as they remain comfortable with yields in the fixed income market. Regardless of expectations of downward pressure on the yield environment during the period in sight, we do not expect a steep decline in yields. Thus, we expect domestic investors will remain content with yield offerings.

“For foreign investors, we expect developments around FX stability and macroeconomic policy framework to influence their decision on whether to invest in Nigerian equities. While we expect decent improvements in the FX situation for Nigeria, we expect it to come a little too late to trigger positive sentiments for Nigerian equities. On the other hand, we expect foreign investors to remain wary of the sustainability of economic recovery given the weak policy framework and fragile fiscal situation,” they noted.

However, situating their arguments for the anticipated outcome of the domestic market in the second half, FSDH market analysts examined the intrinsic value of Nigerian equities to provide clarity on whether they are on average undervalued, overvalued or fairly valued.

On a price to earnings (PE) ratio basis, the benchmark for Nigerian equities which currently trades at 14.2x PE ratio is 5.0 percent higher than the index’s five-year average of 13.5x, signaling that Nigerian equities may be overvalued. However, they noted that the five-year average includes a turbulent period for Nigerian equities, which saw depressed valuations for most Nigerian stocks. Thus, when compared to the historical psychological fair PE ratio benchmark of 15.0x, Nigerian equities can be considered undervalued.

“That said, we believe Nigerian equities should be valued higher than the historical psychological benchmark of 15.0x. Our argument is premised on the additional listing of premium stocks such as MTN Nigeria, Airtel Africa and BUA Cement over the past years. The additional listing of these stocks has expanded the weighted average value of the ASI’s earnings per share (EPS), causing a widening divergence between value and price. Clearly, we think Nigerian equities are decently undervalued due to negative sentiments around the Nigerian macroeconomic environment. Across peer market comparison, Nigerian equities trade at a discount of 14.4 percent and 17.2 percent, respectively, to frontier and emerging market peers,” they pointed out.

That said, market analysts think the Nigerian equities market will largely remain in a lull with spurts of bullish sentiments in specific months as there are still expectations that the performance of the equities market in months where earnings scorecards are announced will show decent gains as investors take positions in stocks expected to deliver solid numbers and raise chances of improved dividend payments.

“Overall, our preferred strategy is to take advantage of dips in stock prices to position ahead of buying activities and dividend hunt sprees during the earnings season. In addition, we retain our non-banking stocks strategy bias which stands particularly for listed companies in the FMCG, Brewery, Food Processing, Telecoms and Cement sectors to trade in a tight range,” the analysts asserted.