By Yemisi Izuora/Agency Report
Nigerian equities will remain on the downtrend in the months ahead as quoted companies grapple with macroeconomic challenges and investors gauge the continuing impact of the declining crude oil price and political transition on the economic outlook.
Investment pundits said quoted equities would in the immediate months continue on the downward trend, although share prices may recover in the latter months of the year.
Nigerian equities lost N1.75 trillion last year, representing average full-year decline of 16.14 per cent.
Analysts at Bismarck Rewane’s Financial Derivatives Company (FDC) in their latest review stated that quoted equities would struggle with local and global challenges this year, leaving the market mostly on the negative in the first half.
“The Nigerian stock market may be in for a prolonged stay in the bear territory due to mounting global and domestic uncertainties. In 2015, a lower return trajectory is anticipated since the market is in for a bumpy ride and some companies would be left behind,” FDC stated.
According to analysts, the stock market is expected to dwindle further all through the first half and subsequently bounce back in the second half of the year.
Analysts noted that the likely increases in the United States and euro zone interest rates raises the threats of capital flow reversal and erosion of funds from the equity markets, which, in addition to growing macroeconomic risks, may result in a series of adjustments and prompt a cohesive movement of sectors and stocks prices.
“The year 2015 is expected to be a mixed year for the equities market as the outcome of a plethora of external and internal events unfold. A possible interest rate hike in the United States and the possibility of a sustained period of low oil prices are significant risks. The outcome of the 2015 elections would also determine investors’ participation and sentiments. The anticipated loosening monetary stance of the Central Bank of Nigeria (CBN) post elections will also have its impact on price and currency stability,” FDC stated.
They pointed out that returns in 2015 will depend on selecting the right companies in the right sectors, rather than relying on a broad-based approach that depends on the gathering momentum of the overall market position.
They said the performance of the market might be coloured by the general elections starting on February 14.
According to analysts, in addition to the global oil market dynamics, the prospects of the Nigerian economy in 2015 hinges on the electoral calendar, and this will mainly determine the macroeconomic outlook during the year.
“With stocks currently trading at their multi-year lows, we expect an upward trend in the beginning of the year. The anticipated loose monetary stance will be expected to channel additional liquidity to the stock market. However, Investors sentiment will be weighed down by political tensions leading to the 2015 general elections. The tension between the Peoples Democratic Party (PDP) and its major opposition All Progressives Congress (APC) is expected to lead to a lull in the equities market as investors, mostly foreign evaluate the electoral process and outcome whilst fearing post-election violence. Foreign portfolio investors are expected to remain wary of the local bourse until the elections are concluded and possible violent fallouts curbed,” analysts pointed out.
They noted that with oil prices projected to trend between $50-$70, the global crude price will be negative for the Nigerian economy and in turn the capital market, with the oil stocks expected to bear the brunt of declining oil prices given the thinning out of the sectors profitability.
Besides, analysts noted that as the US economy gains traction, there could be an increase in interest rates in 2015, which is expected to have a negative effect on emerging and frontier economies. This will lead to heavy portfolio reversals, as investors will opt for safety and security in a much developed market. This may lead to a selloff in local equities as foreign investors exit. However, this may be cushioned by increased participation of local investors as stocks become increasingly attractive.
“The state of security in the country especially in the north eastern part of Nigeria continues to be worrying. Its effect continues to weigh on the profitability of consumer goods companies as consumer spending in these areas remains weak. It has also in-creased the cost of doing business in these areas. Profits that will be declared, if any, in the financial year 2014 by most companies are likely to be below investors expectation. Most sectors; banking, consumers, oil and gas, conglomerates will not be insulated,” analysts said.
Analysts said the macroeconomic outlook will likely change significantly depending on the outcome of the general elections, pointing out that 2015 will be distinctly divided into different phases including pre-election phase, handover phase and post-election phase.
In the pre-election phase, policymaking will be overshadowed by political campaigns and the elections in this period. As a result, most macroeconomic indicators are likely to be influenced by speculative market activities to hedge any unfavourable outcome. The intensity of political activities towards the election could increase security concerns and result in the hike of consumer prices, dampen economic output as well as growth. This is likely to have negative impact on investors’ confidence and increase dollar demand pressure.
Analysts noted that the immediate period after the elections would still be overshadowed by concerns as parties debate the election results. These challenges will likely affect the macro environment and policies options while the level and intensity of uncertainties will heighten the level of insecurity in most part of the country. Hence, movement and transport of goods and services become difficult leading to an uptick in the inflation rate to above 10 per cent and poor economic output. Investors’ confidence is likely to also decline and lead to an increase in currency pressures as the naira slides to N190-195/$ at the interbank market.
“In general, the Nigerian macroeconomic environment is expected to be mixed and highly influenced by developments in the global oil and financial markets. However, the medium and long term prospects of the Nigerian economy depend on developments in the oil section, political events as well as enforcement of tax compliance to boost revenue,” analysts stated.
‘’One of the positives apart from the obvious that the Nigerian economy has to be less dependent on oil is that prices in the stock market may have hit rock bottom. Current stock prices appear attractive at the moment, but we advise cautious investing with a focus on long term value as opposed to speculating and searching for short term gains. We also expect some volatility over the coming months until after elections. A return to normalcy, the stability in oil prices and the Naira will return some calm to the markets’’.