NSE returns to year high as analysts express optimism on Nigeria’s equities

Nigerian equities are expected to be up in 2014.

The Nigerian Stock Exchange, NSE, has been on the up in recent weeks. In the past days, the stock market index has rallied back to its 2013 year-to-date (YtD) level with the index crossing the 39000 market.

Commenting on the development, Akinbamidele Akintola, Africa Equity Sales, Equities / African Equity Product Distribution, Renaissance Capital, said the development was anticipated, but at a later period.

“I had anticipated that the index would close the year at 39 per cent (YtD) return in naira terms but it seems that has happened earlier than I had anticipated,” he said.

The Stock Exchange’s All Share Index (ASI) stood at 39, 222.02, after trading on Monday. The value of transactions after trading stood at 3.974 billion, recorded in 5, 929 deals. The volume of transactions stood at 545.2 million after the day’s transactions while the Exchange’s market capitalisation also stood at 12.54 trillion.

Mr. Akintola said Nigerian equities are expected to be up in 2014. He said equities are “expected to be up 10-20% nominally – partly driven by inflation – and partly because we expect global investors to choose Nigeria (current account surplus, low public debt, good budget) over Kenya (twin deficits, higher debt) or Ghana – within the frontier space. Also the shift in May 2014 which will see Nigeria rise from 14% of Morgan Stanley Capital International (MSCI) Frontier market cap to 19% market cap will increase flows to Nigeria.”

He said challenges for the market include the change of Central Bank Governor – with Lamido Sanusi’s term expiring in April 2014 – and the 2015 general elections.

“We prefer the larger banks (First Bank and Zenith Bank) over the smaller banks and direct consumer proxies” he said.

Finance analysts from FBN Capital have also predicted a modest multiple expansion in equities in Nigeria, come 2014. The prediction, along with a host of other economic forecast, was presented at the organisation’s 3rd annual investor conference themed: Tomorrow’s Nigeria through Economic Empowerment.

While giving the firm’s 2014 outlook on equity/fixed income views, Olubunmi Asaolu, Head, Equity Research, FBN Capital, said, “A modest multiple expansion is expected on equities and banks and the cement industries are slightly favoured over consumer goods. To our minds, consumer goods have expended the market’s goodwill”.

The prediction, which is expecting to see more investment in the nation’s equities, is in line with Nigeria’s present stance as an attractive hub for investment.

On fixed income, he said risk-reward appears more favourable than equities. He said the outlook on real growth of the nation’s economy was expected to rise to 6.8 per cent from an expected 6.7 per cent at 2013 year end, compared to 6.6 per cent at year end 2012. Inflation is also predicted to rise to 8.0 per cent year end 2014, from an estimated 7.7 year end 2013, compared to 12.0 per cent year end 2012.

Gregory Kronsten, Head, Macroeconomic and Fixed income Research, FBN Capital, also predicted that the Central Bank of Nigeria’s rationale for caution and its tight monetary stance since quarter three 2010 is likely to run through 2014.

“The Monetary Policy Committee has maintained a tight monetary stance through its policy rate and tools such as the Cash Reserve Ratio (CRR) for banks. Rather than ease in the period to end-2014, our view is that it is more likely to tighten its position in further defence of its objectives,” he said.

According to him, the stance has helped to deliver striking achievement on inflation, with the nation recording single digit inflation for nine successive months.

“The Central Bank is expected to narrow its objectives from single digit to a range of 6 per cent and 9 per cent,” he said.

“One reason for the tight monetary stance is to compensate for lapses in fiscal discipline, which in the MPC’s view have increased in 2013”, Mr. Kronsten said. “The Federal Government’s intentions in its medium term expenditure framework are laudable but are set to be frustrated by the National Assembly.”

Highlighting an attractive scenario for investment, he said “We see stability for the naira, a tight monetary stance and single digit inflation in the forecast period. The authorities believe firmly in offering positive returns in real terms”.

The main risk to this picture, he said, is not tapering, but a sharp fall in oil revenues. “Our oil price projections however suggest that Nigeria will escape this fate

He also said there was an expected substantial rise in the nation’s GDP. He highlighted that, presently, there was a robust GDP growth driven by the non-oil economy. Growth was above five per cent per year, for more than a decade. Although it slowed down to 6.2 per cent year on year quarter 2 2013, he said it rebounded to 6.8 per cent in quarter 3, 2013.

He said there was good growth in the nation’s manufacturing sector, but not yet on a scale to deliver consistent double-digit GDP growth.

“Non-oil revenue is finally growing, but from a very low base. The contraction in the oil economy in five of past six quarters due to underinvestment and production losses” he said, adding that despite the seeming challenges, there is an expected substantial rise in GDP.