Goddy Egene
The Nigerian equities market went down by N1.303 trillion in the first half(H1) of 2021, driven by profit-taking, shift to the fixed income (FI) market by local investors due to uptick in yields and low participation by foreign portfolio investors(FPIs). Having posted a record growth of over 50 per cent in 2020, the market was expected to sustain the positive performance in 2021 with some moderation.
But after rising by 5.3 per cent in January, the bears set in February and March as sudden upticks in yields in FI attracted investors away from the equities market.
As a result, the market ended the first quarter (Q1) with a decline of three per cent. Bullish reactions to positive 2020 full year and 2021 Q1 earnings seasons made the market to close April with a 2.0 per cent growth.
However, the end of the earnings seasons saw the back of the bulls as the market depreciated in May and June, bringing the overall decline in H1 to N1.303 trillion.
The market capitalisation fell from N21.063 trillion at the beginning of the year to close at N19.760 trillion at the end of June, while the Nigerian Exchange (NGX) Limited All-Share Index (ASI) declined from 40,270.72 to 37,907.28.
However, the weak performance of the market in H1 did not come as surprise given the expectations of most market stakeholders and analysts who had envisaged that the market would be bearish for a significant period under review.
Norrenberger Financial Group’s analysts had projected that the activities of the bears would outweigh the positives in the equities in 2021 based “on the limited upsides of stocks given the overbought status, mid-term uncertainties, the weak macroeconomic backdrop and thin foreign investors’ participation.”
According to them, the Nigerian equities market in 2021 will be shaped by system liquidity, corporate earnings, attractive corporate dividends, foreign exchange and foreign portfolio investors.
Analysts at Cordros Securities had at the beginning of the year said the market’s performance would be determined by domestic participation, which would be supported by the low FI yield environment, liquidity surfeit, investors positioning for dividends and stronger corporate earnings growth (mostly on the low base in 2020).
“We expect the NGX ASI to record a positive performance in 2021, albeit substantially lower when compared to 2020. ASI currently trades at a P/E (x) of 12.5x, making it just about fairly valued compared with its seven years average of 12.2x, but still cheaper compared to frontier market peers of 15.1x,” they had said.
However, in March, Cordros Securities reviewed its position, saying that following the earlier-than-expected reversal in FI, their views on the timing of some of their key factors to watch had changed.
“Consequently, we revise our base case estimate for market return in 2021 downwards to 8.8 per cent (previously: +12.8 per cent). Over the rest of first half of 2021 (H1-21), we believe the interplay between corporate actions and yields elevation in the FI market will continue to shape market performance.
“As a result, we expect a choppy market, albeit with a bearish bias, as investors remain increasingly reluctant to leave gains in the market,” they said.
“We do not rule out the possibility of a broad market sell-off at the end of the earnings season, which typically ends in the mid-second quarter (Q2). To this end, the continued uptick in yields would be a bad omen for the market,” they added.
Looking beyond H1, they saw scope for positive market performance, hinging their views on the prospects of improved macroeconomic conditions and the possible return of FPIs underpin their view.
“We expect economic growth to maintain its positive growth trajectory. We believe this bodes well for improved corporate earnings, particularly cyclical stocks, over the medium term. On FPIs, we think the tacit devaluation (naira has been devalued by 7.0 per cent in the I&E window thus far in 2021) engineered by the Central Bank of Nigeria (CBN) alongside rising crude oil prices raise the possibility that foreign investors may make a gradual return to the local bourse. Specifically, sustained higher crude oil prices will support accretion to the FX reserves,” they added.
According to them, there should be a material improvement in liquidity conditions, bringing some comfort to foreign investors.
They, however, added that they did not think that FPIs would return in droves as in 2017, due to concerns around the exchange rate framework and structural reforms to improve the domestic economy’s resilience.
They said: “Interestingly, the second half (H2)of the year when we expect improved FPI participation also coincides with the period when domestic investors will be taking positions in stocks ahead of half-year dividend announcements. Thus, we think a more robust market recovery post-H1-21 is on the cards.”
Commenting on the HI market performance, Executive Director, NOVA Merchant Bank Limited, Mrs. Funke Okoya, said the bearish run in the equity market over the past three months, especially in June, was reflective of the rising appetite of investors in alternative asset classes, particularly FI and dollarised assets.
“Notably, the steep rise in the yield on sovereign instruments like treasury bills and FGN Bonds has undermined the risk appetite of investors for equities, as most high net worth investors (HNIs) and institutional investors now take comfort in the low double digit rates in the fixed income environment unlike in 2020 when yields on treasuries were near zero and bond yields waned to a low single-digit. More so, as concerns on probable naira devaluation continue to fuel speculative demand for foreign currency (FCY), equities have seen a notable outflow of funds, notwithstanding the attractive valuation of large- and mid-cap counters with strong fundamental,” she added.
Okoya stated that while the devaluation risk is partly speculative, genuine concerns on reduced liquidity in the foreign exchange (FX) market, which has constrained some foreign investors from repatriating dividends and proceeds of divestment has influenced the weak participation of foreign investors in Nigerian equity market.
She added that the phenomenon reduced the average daily value of transactions from the impressive N5.4 billion level in the Q1 to barely N3 billion in the second quarter(Q2) of the year.
“Nonetheless, the market is attractive at the current level, both from a time-series perspective and compared to frontier and emerging market peers. A number of value counters, especially within the banking sector, have compelling dividend yields and may be bellwethers in the quarters ahead, especially as the yield on a fixed income instruments may have peaked. More so, a recent modest increase in FX liquidity on the I&E window and expected enhancements in liquidity and policy measures on the back of the Central Bank of Nigeria (CBN) commitment to deepen and enhance the market should be positive in stabilising the naira, a development that should support the recovery of the market in the quarters ahead. Thus, our research team at Nova Merchant Bank is cautiously optimistic on a positive return on equities in the H2 of the year, as we expect macro improvements and sustained fundamentals of large and mid-cap companies on the NGX to reinforce our expectation of modest recovery in equity prices, going forward,” she said.
