Investors show lukewarm attitude as economic concerns weigh

Investors remain halfhearted in buying stocks this week as market volatility, economic policy direction, and bank balance sheets concerns take their toll on Nigerian businesses.

Amidst speculations of a possible exclusion from the MSCI frontier markets index, Nigerian equities raced southwards at this week open despite that oil prices rose on Monday, extending a sharp rally seen at the end of last week. Africa’s biggest economy suffers dollar shortage (following a slump in global oil prices) an expected effect from a mismanaged reserve.

Nigeria’s headline inflation rose sharply to 12.8percent year-on-year (y/y) in March according to the Consumer Price Index (CPI) report published by the Nigeria Bureau of Statistics (NBS). With this inflationary threat, market analysts expect that monetary policy will get tighter in a bid to fight inflation, but reiterate that prices are currently being driven by supply factors to which tightening will have little effect.

S&P cut Nigeria’s outlook to negative, rating remains at B+. The rating downgrade was due to exchange rate pressures; deterioration of Nigeria’s fiscal or external accounts; and increased stress in the financial sector than expected. The MPC resumed tightening after three months of accommodative monetary stance in move to address inflationary pressure.

“Whilst risk-based trading was the dominant sentiment, last week’s action was underscored by below-average trading value as macro environment and growth concerns weighed on market sentiment. In the absence of any catalyst to drive the market, the Nigerian bourse may continue in the bearish territory this week”, said research analysts at Lagos-based investment house, Dunn Loren Merrifield.

Index provider MSCI is seeking feedback from investors on the ease of access to the Nigerian equity market, a move that could lead to Nigerian equities being excluded from the MSCI Frontier Markets Index. The consultation comes amidst persistent illiquidity in the foreign exchange market, MSCI said in a statement issued late last Thursday, adding that it would announce its decision on or before April 29.

“We expect the exclusion, if it crystallizes, to significantly impact the market with estimated $500 million of MSCI benchmarked money tracking Nigeria.

“The Nigerian bourse see-sawed between positive and negative territory this past week with key sectors trading mixed. Pressured by the weak market sentiment as indicated by thin market volume and value of transactions, we expect the see-saw trading pattern with a bearish bias to persist into this week,” equity research analysts at Vetiva Capital Management Limited said in their breakfast report.

“As investors gear up for the first-quarter (Q1) 2016 earnings releases, we think these numbers might disappoint reflective of the impact of a myriad of headwinds to the domestic economy over the period. This, together with market reactions to the MSCI announcement in the past week, will likely see bearish sentiment dominate equities. That said, we think it is a good time for investors with a long term horizon to cherry pick, as the NSEASI on a trailing P/E of 8.2x remains one the cheapest amongst peers”, said research analysts at United Capital plc.

“Allocation to equities declined from 9.46percent in December 2015 to 8.15percent in March 2016 due to the general decline in equities prices for the period. The equity market has been mostly negative in 2016. Valuations are relatively cheap but weak growth and challenged banking system continues to affect investor’s sentiment.

“Market sell-off is to begin after earnings’ result announcement on lack of other market catalyst. Tightening financial conditions and lower oil prices are to weigh on the markets”, Bismarck J. Rewane, MD/CEO, Financial Derivatives Company Limited said in a presentation at Lagos Business School Executive Breakfast Session.

“We believe the persistent fuel shortages amidst weak economic fundamentals may continue to impair investor sentiments,” said research analysts at Meristem Securities who noted that they do not anticipate a significant change in market performance this week.

Iheanyi Nwachukwu