After two consecutive years of a bearish run in the equities market (2018 -17.8% and 2019 -14.6%), we begin 2020 on a positive note. Interestingly, the poor performances in 2018 and 2019 came despite relatively stable currency and attractive valuations.
Going into 2020, can we realistically expect a re-pricing of assets and such currency stability? Our base case is that the currency will remain stable despite external and domestic pressures, supported by firm oil prices which will aid continued CBN FX interventions.
The year 2020 has begun on a positive note with the ASI returning +9.8% ytd. The question on the minds of most investors remains the sustainability of this rally till the end of the year. While we don’t rule out the possibility of Nigerian equities posting another negative return this year, technical analysis of market trends and the current policy environment points to a greater probability of a positive close.
Following CBN’s announcement barring non-banking corporates as well as individuals from accessing the OMO market, increased liquidity in the secondary debt market, as well as auctions, has since sent yields crashing. There has been a sharp decline in Nigerian Treasury Bills rate at the primary market auction over a three-month period from 12.94% before the announcement was made to 5.1% at the last auction.
We believe key institutional investors with trillions of debt assets maturing in 2020 will be searching for alternative investment opportunities given negative real returns on debt and money market instruments. Thus, we expect some of these funds to filter into the equities market.
Valuations also remain compelling. Across Emerging Markets (EMs) and Frontier Markets (FMs), Nigerian equities remain unarguably the cheapest judging by trailing PE ratio. The ASI had a PE ratio of 7.1x compared to MSCI EM and MSCI FM of 15.4x and 10.6x respectively. African peers like South Africa, Egypt and Morocco traded at trailing PE ratios of 15.7x, 11.8x, and 21.1x respectively.
In our view, the key determinants of Nigerian capital markets remain oil price, the smooth running of the banking system, and the health of the economy. Asides global risk, a major risk facing Nigerian capital markets in 2020 stem from recent policies of the CBN and their possible negative impact on banking sector profits. Oil price risk and in effect currency risk stands out as an extraneous factor that could deteriorate, hence, a sharp fall in the oil price would have negative implications.
That said, considering the selloff witnessed in 2019, we believe valuations of many stocks remain attractive. Within our coverage universe, we have Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, FBNH, Fidelity, Stanbic IBTC, Sterling Bank, Dangote Cement, WAPCO, UACN, MTNN and Flourmills. Essentially, we anticipate that a rebound in market performance will lead to a re-rate of these stocks.
With the major global central banks likely to maintain an accommodative monetary stance in 2020, risks of severe capital flight is significantly subdued. Furthermore, tensions in oil-producing countries coupled with OPEC+ cuts should support FX earnings.
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