Equities Down in the Dumps.... Investors await Policy Signals

The Nigerian equities market sustained two weeks of sell pressure to reach a 36-Month low on the 2nd of December 2015 as the benchmark index closed at 27,287.89, representing a 21.3% Year to Date decline. For the most part of 2015, sentiment on the bourse has been bearish due to the low crude oil prices, weakening domestic economic fundamentals and exchange rate constraints that have weakened risk-appetite of domestic investors and stalled portfolio capital flows into the financial market.

The emergence of President Buhari at the March 2015 polls brought a temporary respite to the market, with the All Share Index (ASI) recording a positive return in the 2nd quarter of 2015 (+5.4%) while most sector indices also closed in the green. However, the delayed formation of the Cabinet, lack of fiscal policy direction, foreign exchange restrictions by the CBN, tight monetary policy and weak fiscal spending which impacted consumer and investment spending in the economy ultimately resulted in a sub-optimal GDP growth (below 3.0% in Q2:2015 and Q3:2015) and weaker company scorecards.

The Nigerian equities market, which was undervalued compared to its emerging market peers before the new government was inaugurated in May (with P/E multiple at 12.8x relative to a peer multiple of 14.0x on 28 May, 2015) became overvalued due to the much weaker earnings recorded in 9M: 2015, causing the market P/E to shoot up to 18.2x compared to the average for emerging (12.7x) and frontier (10.4x) markets. In the past 3 weeks, sell pressure has intensified in the market as portfolio managers and retail investors reduced their exposure to equities.

As the market continues to await the 2015 Appropriation Bill to gauge fiscal policy direction of President Buhari, the decisions of the MPC at the November MPC meeting offer a clear picture of short to medium term monetary policy objective of the Apex Bank and the corresponding trade-offs. The Committee decided to ease monetary policy (which would lead to an expansion in money supply) by easing liquidity in the financial system and cutting the benchmark interest rate, which suggests the pre-eminence of the objective of boosting domestic credit growth over stabilizing price level though there is a contrived stability of the exchange rate.

The realities of funding the 2016 budget may ultimately lead to a devaluation before the 2nd half of 2016 which may signal a turn of market sentiment. More realistic drivers of sentiment that may materialize in the short to medium term and garner investor confidence for equities include success of the economic team of President Buhari in articulating a Fiscal Plan to reflate the economy with emphasis on investment in key infrastructures (transport, power, support for SMEs, domestic agriculture and agro-based industries) by the administration, reduction in government overhead and removal of unproductive spending such as subsidy.

We perceive that a number of these signals are not supportive of a short term phenomenal change in the current bearish equities dynamics. Consequently, it is our opinion that the current equities market condition may persist with pockets of opportunistic value seeking position-taking that may guarantee short term market gains which may not be sustained until any of the anticipated fiscal and monetary signals comes into force.