Envisioning another Positive Performance

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Having posted a record growth of 50.03 per cent in 2020, analysts are predicting that the Nigerian equities market would still end 2021 in the positive territory, writes Goddy Egene

Stakeholders in the Nigerian stock market will for a very long time remember 2020 as the year that they reaped bountiful harvest from their investments. That was the year the benchmark Nigerian Stock Exchange (NSE) All-Share Index (ASI) posted its highest gain of 50.03 per cent. The growth was better than the 47.19 per cent posted in 2013 and 42.3 per cent recorded in 2017.

Although the market was expected to close positive in 2020 after declining in 2018 and 2019, the high level of growth was never envisaged. Hence, it has been celebrations for many stakeholders as the market soared by 50.03 per cent in spite of the prevailing weak economic fundamentals that resulted from the impact of the coronavirus outbreak.

Having posted such a record growth last year, there are still high optimism that the bull run would be sustained in 2021 with intermittent profit taking. On the first trading session of the year last Monday, the bulls showed strength as 32 stocks appreciated, compared with only two that depreciated, thereby further pushing up the index by 2.2 per cent.

Market analysts said all the factors that led to the impressive performance in 2020 are still present and would continue to keep the market in the bulls’ territory going forward. In the opinion of analysts at Investdata Consulting Limited, the market would likely to maintain the positive trend until end of 2020 full year earnings reporting season.
They based their optimism on the fact that for now, there is no other investment windows that has returns and yields that can match the dividend yields of some listed companies still selling below their fair value.

The Chief Research Officer of Investdata Consulting Limited, Mr. Ambrose Omordion, said the market is set to breakout the 41,000 resistance level, owing to high cap stocks rallying on the strength of positive sentiment, which is of interest to many investors, considering the weak economic fundamentals.
According to him, the 2021 outlook is mixed in the sense that it looks positive but dicey, considering the second wave of Covid-19, despite the ongoing discovery of more vaccines and its distribution.

“Government should make policies to encourage more listing to deepen the market in order to play its role of driving the economic development by providing platform for long borrowing, regulators should protect investors and collaborate with research companies to provide proper investment and financial education to attract more participant to the market,” he said.

He explained that if the market is to create jobs for Nigerian youths by engaging in share trading with their little funds with the aid of technology and remote trading, government should reduce cost of trading or transaction to encourage and attract more investors.

Analysts at Cordros Securities said the mix of elevated liquidity, low interest rates, attractive dividend yields, and earnings recovery argues in favour of an extension of the equity bull market into 2021.
According to them, the performance in the fixed income market will be a tale of two halves, saying they expect yields to remain in the low single-digit territory through first half (H1) of 2021 with a moderate uptrend to account for reduced market participation as investors seek yields in other asset classes.

“However, in the later part of the year, we believe that a combination of weak market participation, revision of monetary policy to a tightening cycle, widening fiscal deficit, and fragile macroeconomic environment will lead to an increase in yields over 2021.

“Similar to the fixed income market, we also expect it to be a tale of two halves for Nigerian equities in 2021, with the market delivering further upside in the first half of 2021 before retracing slightly in the second half on an expected reversal in fixed income yields. The sources of risks remain plenty, the macro story remains uninspiring, and valuations are elevated,” they said.

Looking at some sectors of the market, the analysts said they are overweight on Nigerian banks as they expect a combination of strong dividend yield expectations, and resiliency of sector players into the full year 2021 financial period to support price performances.

According to them, in Nigeria’s cement sector, volume growth in 2021e will be modest due to the lingering impact of the pandemic on government finances and household income.
“ Although the stiff competitive landscape coupled with soft industry conditions will deter industry players from raising prices substantially, we still see scope for marginal increases in prices,” they said.
Cordros Securities noted that for consumer staples, it’s a mixed bag, while agriculture stocks are likely to benefit from improved volumes from new maturities.

“However, the border reopening is a significant risk to pricing and by extension top-line growth. Brewery stocks are expected to record better volume growth in 2021 full year, mostly due to the low base from 2020 full year. However, the ability of brewers to increase prices above inflation remains constrained. Surging inflation and FX illiquidity will also put pressure on input costs and margins,” they said.

The analysts added that on telecoms, there is a potential negative impact on Q1-21 revenues and earnings if the Nigerian Communications Commission (NCC) does not extend the NIN registration deadline and lines are disconnected.
The President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, said he expected positive trend of 2020 to continue into the 2021, noting, however, investors should ensure that they speak to their certified stockbrokers before taking any decisions.
Omolegbe had said the most gratifying fact about last year’s performance was that it was actually backed by fundamental performances of our quoted companies.

“The performance also underpins the need for improvement in liquidity flow to the market through various sources that we at the CIS have been advocating in the last few years,” he said.
According to him, the reduction in interest rate and fixed income yield has been a net positive for quoted companies that are now able to borrow cheaper to finance their operations as well as for market operators that can see renewed interest in the financial markets.

“The NSE’s performance is also an affirmation of our market’s increasing correlation with other global market markets,” he said.
Looking at how the equities market would perform this year, a stockbroker and Chief Executive Officer of Sofunix Communications and Investment Limited, Mr. Sola Oni, said it would be positive.
According to him, demand for equities has strongly enhanced market upswing as yields on other asset classes, especially fixed income securities are low.

“The Central Bank of Nigeria’s policies that encourage credit to the real sector in an environment of low interest rate are expected to be sustained. We expect the federal government to utilize the market to finance N5 trillion budget deficit for 2021 through the market. States governments can also take advantage of the capital market to mobilise funds for development projects. This will have multiplier effects on transaction on the exchange,” he said.

Oni noted that if the introduction of vaccine to combat COVID-19 is pursued vigorously, it will enhance operations of quoted companies, boost return on investment (ROI) and attract more investors into the market.
“However, it is hoped that security issues would be addressed to reduce country risk while another wave of COVID-19 pandemic shall not scuttle all projections,” he said.
Prof. Uche Uwaleke of the Nasarawa State University Keffi, had said the outlook for the Nigerian capital market post-COVID-19 was positive.

“The market has performed well despite the COVID-19 pandemic. However, the second wave of COVID -19 in developed countries like the United Kingdom(UK) and United States (US) is likely to have an impact on capital importation especially foreign portfolio investments. Furthermore, there is likely going to be a possible collapse in international crude oil price, depletion of external reserves and exchange rate pressure if the pandemic is not contained effectively.”

“We have had good news that there is a vaccine and so what the government needs to do is to pursue aggressive export base diversification to reduce vulnerabilities to external shocks and boost external reserves, tackle insecurity and continuously improve ease of doing business, address infrastructure gaps through PPP, issue more of infrastructure bonds such as Sukuk and Green bonds which are tied to self-liquidating projects and deploy policies favourable to stock market growth and which support economic recovery,” he said.

In her assessment, the Group Chief Executive Officer, Emerging Africa Capital, Oluwatoyin Sanni, said the outlook for capital markets globally is positive and will be driven by the gradual return to businesses.
According to her, we know that there is a second wave but we also know that there is a vaccine on its way to us and psychologically that will be an encouragement to investors.

“Furthermore, the implementation of the African Continental Free Trade Area Agreement (AfCFTA) across Africa will see opportunities for some of our larger companies to make a foray into the African markets.
“We know that there will still be renewed lockdowns in the UK and new strings are coming up but I think the worst is over and 2021 will not be anywhere near 2020. I say this because the economy has learnt how to deal with the virus and recognized that total shutdown of activities is not the best way to go, especially for developing economies like ours and so as long as the responses are pragmatic, the outlook for the capital market will more likely be favourable,” Sanni said.