Bearish Start to the Year: Where is the Bottom?

Second week running into 2016, the Nigerian economy and financial market appear to have taken a worse turn. Pressure on global oil prices intensified during the week (Brent Crude declined 22.6% YTD to US$29.2/b) dampening investors' sentiments on Nigerian equities. The falling oil prices signals a further depression on the performance of fiscal budget for 2016 given the dependence of Nigeria on oil revenue. There is an increased need for the fiscal authority to review the assumptions of the 2016 budget in line with current realities. Although the budget proposed 13.0%, 50.2% and 36.8% of 2016 total expenditure will be financed by oil, non-oil and debt revenue sources respectively, the strains on the oil component and the limited options from other financing sources seem to be threatening domestic fiscal stability.

The level of external reserves has persistently declined, shedding 0.7% in the week to close at US$28.7bn as against US$28.9bn last week Friday. Unexcitingly, this is further compounded by the CBN's unfriendly restrictive policies on forex which are targeted at preventing further depletion of the reserves. The result has been the widening gap between demand and supply for the greenback. During the week, the CBN reneged on its earlier policy, announcing its decision to allow commercial banks accept foreign currency deposits but was not clear on whether foreign currency transfers or withdrawals can be made. The Apex bank also announced its resolve not to sell foreign currency to BDCs anymore stating that operators deal more as wholesale traders rather than serving the retail end of the market. The result was a further weakening of the naira by 8.3% (closing at N300.00/US$1.00) at the parallel market in the week. Events within the global space, particularly the slowing Chinese economy have also weakened sentiments on major global markets with the contagion effect noticeable across emerging and frontier equities market.

Consequentially, Nigerian equities market suffered a major setback in the week after shedding 13.0% to bring the YTD return of the All Share Index (ASI) to -17.9% in just 10 trading days against 17.4% decline the market suffered in 2015. The tsunami of massive sell-offs in the week was noticeable across sectors, large caps and blue chip stocks underscoring the generally weak market sentiments. In our view, the domestic macroeconomic headwinds and the global concerns have battered investors' confidence and triggered the massive run to safety. The ASI fell to 23,514.04pts in the week - similar to the levels last seen in 2011 -- prompting the NSE to approve the Circuit Breaker rule which will be implemented if the market loses 5.0% in intraday trade.

In light of this bearish run, the pertinent question is, "where is the bottom?" Our analysis of the market since 2005 suggests that the bottom may be close to around the 20,000.00pts. The index has always upturned around this point as was the case in 2005, 2009 and 2011. While this trend analysis may be valid for prior years, we are cautioned by the peculiarities of the current factors dragging equities (falling oil prices, forex uncertainties, monetary policy volatility, poor corporate earnings and global concerns). Thus, we advise that investment decisions be structured for long term horizon. We are of the view that a clearer signal for the bottom (the inflection point) would be a rebound in oil prices and some form of clarity around forex.

Afrinvest Research

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