Nigerian stocks have been on steroids ever since the Central Bank Governor revealed details of the Flexible Exchange Rate policy that will officially see the Naira float.
Much of the Euphoria following the new policy is mainly due to the fact that it could not throw open the window for foreign investments into Nigeria. One of the earliest receivers of foreign investments into Nigeria is typically the capital markets represented by the inflow of foreign portfolio investments into Nigeria.
As expected, the Nigerian stock market has reacted in kind gaining about 5% within two days. So investors are pouring into stocks that they know could benefit immensely from a spike in valuation as soon as FPI’s begin to return into Nigeria. We have also been tracking these stocks and list the following sectors/companies as those that could benefit from the new forex regime;
Banking stocks are expected to benefit immensely from this new forex regime considering the roles they will play in a new FX market. Their fee income will rise from the level of transactions they will now be able to process. Even though there is still a risk that the value of the foreign currency loans could get impaired, we believe that most of them are already hedged. Banks play an important role in bringing an economy in recession back into growth so we believe this will benefit their bottom lines and of course their valuations.
Stock picks – Zenith Bank, GT Bank, Access Bank, UBA
This is one industry that is ripe for the taking in the current economic climate. A lot of the companies are poorly run and starved of funding required for them to tap into a growing market. As competition improves in the banking sector, the insurance industry will not be left behind. Their price earnings multiple is currently down thus resulting in a low valuation. Foreign portfolio investors interested in insurance stocks will surely cherry pick some of the stocks sending valuations up. We have already seen that happen with the scramble for NEM insurance.
Stock Picks – AIICO, Custodian, WAPIC, Continental Reinsurance
Stocks in the Agric sector are also poised to benefit as a weaker Naira can result in a boost to their revenues. These companies make money by exporting Agricultural and oil palm products. Rather than sell the dollars to the CBN at a fixed and controlled exchange rate, they will simply sell to the Interbank at the market determined price. With their functional currencies mostly in Naira, exchange rate gain should increase in tandem.
Stock picks – Okomu Oil, Presco Plc.
Consumer goods stocks
The consumer goods industry have faced really tough times in the last one year as consumer spending dipped due to the harsh economic realities faced by Nigerians. The effect is that consumer goods businesses saw sales dip and expenses sky rocket forcing most to declare huge profitability declines. The stocks similarly went south as valuations plummeted amidst a volatile market that was mostly bearish than bullish. With the new policy, it is likely that valuations could be on the uptick again as foreign investors typically chose to give some of these stocks lofty earnings multiple regardless of their growth.
Stock picks – Nestle, Unilever, Cadbury
Oil and Gas
This is another industry that has been battered by the drop in oil prices. The index is currently down 6.7% year to date as investors continue to place lower earnings multiple on their variations. However, with the price of oil touching $50 (before receding to under $50) there could be light at the end of the tunnel. The companies in the upstream sector are particularly poised to benefit from the new exchange rate regime considering the export proceeds they expect to get. With a further depreciation of the naira, income is expected to rise by the time they convert the proceeds to Naira (Seplat functional currency in in USD). This will surely help cover rising operating cost denominated in Naira and also help attract foreign investments which as stayed away since the CBN imposed capital controls.
For downstream stocks, a further liberalization of the sector means their market share could increase as the level of investments required to compete is expected to rise. Some of the major marketers have the financial leverage to seize the market and could be dominant for a really long time.
Stock picks – Seplat, Oando, Mobil, Total
The government is likely to spend at least N400 billion in capital projects this year out if which most will include road expansion projects, construction of bridges etc. Whilst not directly related to the new policy, they will ride on the momentum created by renewed investor sentiments in the stock market.
Stock picks – Julius Berger, Dangote Cement, Lafarge Wapco