Analysts Predict Downturn in Equities Market over Unrelenting FX Debacle

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Nume Ekeghe

Analysts at United Capital have predicted that the recent upbeat in market sentiment will take a downturn as investors grapple with a volatile foreign exchange, macroeconomic environment.

The firm noted this in its Nigeria outlook 2022, titled: Navigating Stormy Seas where it also noted that Nigeria growth through 2022 is expected to be a sluggish and maintained that naira assets should expect a higher yield environment.

According to the analysts, “For the equities market, from our analysis of the current investment and economic climate, we struggle to see significant improvement in investor appetite towards equity instruments in 2022. We expect Foreign Portfolio Investments (FPIs) in equities will remain downbeat given the unrelenting FX debacle, upcoming elections, and volatile macroeconomic environment.”

It added: “In the equities market, bullish momentum from 2020 was initially carried over into early 2021, as seen in Jan-2021, /m return. However, this was halted by a slowdown in fixed income and treasury maturities, which tightened when the index printed a strong 5.3% m liquidity in the financial system.

“The story changed in H2-2021 as the downward reversal in the yield environment, caused by the actions of sovereign debt managers to keep borrowing costs manageable, emerged as a tailwind for equities. Higher oil prices and robust corporate earnings growth aided by the 2020 low base effect fueled the rebound, with the NGX-ASI closing the year at 42,716.4 index points with a return of 6.1 per cent, beating our base case expectation of 4.3 per cent.”

Furthermore, it added, “heading into 2022, our prognosis for the yield environment is that we expect a higher yield curve in 2021, premised on aggressive government borrowing and a hawkish monetary policy.

“The government plans to borrow N5.2 trillion from the domestic and international debt market to finance its 2022 budget deficit. Also, policy normalisation in developed markets, depressed FPI flows, and stubborn inflationary pressures are factors that we expect to support a preference for tighter monetary policy.

“The yield environment was an intriguing phenomenon in 2021 as the fixed income market rebounded after record lows in 2020. Our expectation of a rate reversal on the back of tighter system liquidity increased domestic debt financing, and demand for higher rates from private sector money managers materialised.”

“True to our expectations, average yield across the yield curve reversed higher, albeit faster than initially projected in H1- 2021. However, yields began to moderate in Q3-2021. The major drivers of the higher yield environment were tighter system liquidity and the government’s reliance on the domestic debt market. In the international debt market, the government issued $4.0bn worth of Nigeria Outlook FY-2022: Navigating Stormy Seas Eurobond to finance its 2021 budget deficit.”
“We project economic growth of 1.6 per cent y/y, buoyed by a decent recovery in the oil sector from a two-year-long recession, as an increase in the Organisation of Petroleum Exporting Countries (OPEC)’s production quota and the low base effect will drive growth.

“In addition, we expect sustained growth in the agricultural and services sectors, supported by strong demand for food and improved Internet adoption amid the roll-out of the 5G network. On price movement, we anticipate inflationary pressures to weigh on the market as the high base effect wears off and the true impact of imported inflation reflects on the headline inflation numbers. As a result of price pressures and policy normalisation in the global economy, we anticipate a hawkish policy tone from the Monetary Policy Committee (MPC), ”they said.