NSE DG, Oscar Onyema

Goddy Egene reviews the performance of the stock market in the first half of 2012

The Nigerian equity market ended the first half (H1) of 2012 with a growth of 4.2 per cent few days again, which is an improvement on the 0.82 per cent growth posted in the corresponding first half of 2010. Specifically, the Nigerian Stock Exchange (NSE) All-Share Index rose from 20,730.63 to close at 21,599.57.

However, given the high optimism that greeted 2012 and the ambitious forecast analysts made for the year, the H1 performance is below expectation. Analysts from leading investment banks had projected a growth of 13.3 per cent and 14 per cent.

For instance, analysts at FSDH Securities Limited had said the market would close the year with a growth of 13.3 per cent, while those at Meristem Securities Limited (MSL) predicted 13.5 per cent. Analysts at envisaged a growth of 14 per cent.

For this growth to crystallise, the market ought to have recorded an average growth of 3.5 per cent per quarter. However, the market recorded a decline of 0.38 per cent in the first quarter and ended H1 with a growth of 4.2 per cent. The positive growth was helped by 4.6 per cent appreciation the market witnessed in Q2.

Early Optimism
In projecting the robust outlook for 2012, analyst at MSL, which was among the to 10 top stockbroking firms that led equities transactions on the floors of the NSE in 2011, said  their  bullish sentiments were driven by expected performance of  the financial service (majorly banks) sector of the market.

According to them, Nigeria’s stable foreign exchange market, expected downward trend in yield on fixed income instruments and anticipated positive macroeconomic performance also influenced their bullish tendency.

“Our valuation suggests a robust 2012 return of 22.53 per cent for the NSE index, which we believe is justified by the attractive valuations of our coverage companies (which represent 90 per cent of the entire market). However, we are inclined to adopt a conservative outlook.

“This is informed by the outlook on global economy and the increased possibility that the Nigerian market might witness reduced foreign participation in 2012. We therefore discount our forecast by 40 per cent to arrive at an adjusted 23,532.91 index level,” they said.

The analysts explained that their sectoral returns distribution showed their upside bias for the financial service sector particularly the banks, given their fundamentals, weight and volatility.

According to them, they expected sector to dictate and lead market performance in 2012. “Our 22 per cent target return is 82 per cent overweight on the financial sector particularly the banks”, they said.

“We will however, subject our forecast and underlying assumptions to testing and review as events in both the economic and financial markets warrants. Our understanding of market performance and returns distribution is that market returns are always skewed towards a short period of time, and this is expected this to play out in 2012.

“Though we remain watchful on the economic climate given the increasing level of uncertainties that overshadow 2012, we anticipate a fragile first quarter rally and a much stronger rally in the second half of 2012,” they said.
In a similar vein, analysts at FSDH Securities Limited had said that 2012 would be better for investors in equities, as the global and domestic economies were set for improvement.

Their optimism was based on factors such as improved corporate earnings, less aggressive monetary policy implementation by the Central Bank of Nigeria (CBN) among others.

“Other catalysts for the market in 2012 are: improved disclosure by quoted companies as they adopt International Financial Reporting Standard (IFRS); concerted efforts of the Federal Government to improve infrastructure in the country; the current low valuation of quoted companies. On account of these factors, our forecast growth rate for the NSE All-Share Index for 2012 is 13.3 per cent”, the analysts stated.
True to their expectation of MSL, the first quarter had a fragile performance while Q2 performed better, returning a positive 4.6 per cent.

Monthly Performance
An analysis of the H1 market performance showed that four months were positive, while four months closed in green. The month of April recorded the highest growth of 6.7 per cent, followed by March, which ended with a growth of 2.6 per cent. The months of January and May witnessed appreciation of 0.7 per cent and 0.09 per cent respectively.

On the flip side, February posted the highest decline of 3.6 per cent, followed by June which ended with a decline of 2.1 per cent. By the close of H1, the market posted 4.2 per cent. In terms of market turnover, investors traded N50.6 billion shares valued at N347 billion at the close of H1.

One of the positive developments in the H1 was the listing of two new companies on the Nigerian bourse. They are Austin Laz Company Plc and Fortis Microfinance Bank Plc, which listed in February and June respectively.

Operators’ Assessment
While there were high optimism that the market would end with a better performance, operators said some factors have prevented the expected growth. An investment analyst in one of the leading multinational investment/research firms contended that the effort of the Central Bank of Nigeria (CBN) to defend the naira and inflation led to high interest rates.

“When this happened, local institutional investors moved their funds into the fixed income securities market where returns are as high as 15 per cent. While this move was reducing the demand for equities, banks embarked on aggressive mobilisation of funds to beef up their balance sheet position in preparation for end June reporting. This also led to diversion of funds from equity market and the eventual reduced growth,” he said.

The analyst said the economic crisis, which hit Europe, also made some foreign institutional investors to withdraw from the Nigerian market to address the challenges in their home countries.

“Besides, the corporate infraction issues and late profit warnings sent by some quoted companies, discouraged many investors. Ordinarily, profit warning should come months before the period. But what we saw in some cases was that the end of reporting period was over before the profit warnings came to the market. 

“Many investors were not happy over this development because they believe it cast doubt over the figures earlier released by some these companies that informed their investment decisions. The profit warning sent shivers down the spines of some investors who were discouraged from further investments,” he said.

It is also believed that the management crisis that hit the apex regulatory body for the capital, the Securities and Exchange Commission (SEC) contributed to the stunted growth the market posted in H1.

While the report of the House of Representatives ad hoc committee on the collapse of the capital market is being awaited, the Director-General of the SEC, Ms. Arunma Oteh, was asked by the board of the commission to proceed on compulsory leave to enable an independent investigation into the allegations of her mismanagement of Project 50 funds.

It is believed that anxiety and uncertainty generated by this development, affected investor psyche with some of them waiting on the sidelines to see the outcome of the crisis.

Assessing the performance, Mr. Tola Odukoya, said the 4.2 per cent growth was quite encouraging, given the trend over the last 24 to 36 months.

“Obviously, the positive return recorded in the H1 was largely due to the recovery of the banking sector following the activities of the CBN in making banks more transparent and accountable. I also believe positive news of progress made in market-making initiative contributed to an increase in confidence in the ability of the move in the right direction,” Odukoya said.