More financial analysts have expressed optimism that the nation’s equities will rebound in 2020 after declining for two consecutive years.
The stock market had declined by 17.8 per cent in 2018 and 14.6 per cent in 2019 but has started 2020 positively, recording a growth of 10.4 per cent as at Monday.
However, analysts at WSTC Financial Services Limited said they expect the negative trend to reverse this year.
In a special report, the investment bank said: “We expect the trend to reverse in 2020 on the back of lower finance cost for companies, implementation of the minimum wage, and the quick passage and the implementation of the 2020 budget.”
Looking at how some of the sectors will perform in 2020, the WSTC predicted that the banking sector would witness increased loan given the new minimum 65 per cent loan to deposit ratio(LDR) directive by the Central Bank of Nigeria (CBN)
“We foresee an increase in the LDR to 70 per cent in 2020. The decline in yields in investible risk-free instruments and resultant excess liquidity bode well for the banking sector cost of funds. Thus, we expect an improved net interest margin. There will be slight uptick in non-performing loan ratio (NPL) owing to increased loan drive,” they stated.
The analysts noted that lower non-interest income expected on the back of reduction in bank charges by the CBN.
“However, we expect the impact to be partially cushioned by increase in transaction volume on bank’s digital platforms. They will be increased competition in the digital banking space, resulting from the influx of several fintech players,” they said.
Speaking on the insurance sector, WSTC said the ongoing capital raising exercise will continue, with National Insurance Commission (NAICOM) extending the deadline to December 2020.
“However, we do not expect the recapitalisation exercise to stoke any significant activity in the capital market space, due to investor apathy to the insurance sector. The potential of the insurance sector is evident, as industry penetration is currently less than one per cent, much lower than African peers.
“Nonetheless, we still see a little room for growth in terms of return on equities (ROE) and improved earnings, due to socio-cultural challenges associated with the insurance sector. Following the declining yields in the fixed-income market, investment income (a major income line for insurance companies) will be under pressure, thus affecting profitability. Nonetheless, we see some scope for growth, on the back of leveraging technology and introduction of new products, especially to the retail end of the market,” the analysts said.
Looking at the consumer goods sector, WSTC said it had its fair share of hits in the last few years, resulting from declining purchasing power of consumers who are price sensitive, amid a high-cost business environment.
But the analysts said the operating environment was expected to improve in 2020, as various policy reforms are directed towards stimulating aggregate demand in the economy and improving ease of doing business.
“Land border closure expected to positively affect companies. The influx of cheaper smuggled goods has negatively impacted consumer goods companies like NASCON Allied Industries Plc, Dangote Sugar Refinery Plc, Unilever Nigeria Plc and PZ Cussons Nigeria Plc. However, we note that the border closure affects companies who export to other markets. Nonetheless, we believe that the impact is minimal,” they said.
According to WSTC, a major risk to the growth of the consumer goods sector is higher inflationary pressures in the economy, resulting from proposed tariff hike, Value added Tax (VAT)and border closure.