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Equities market will be favourable to local, foreign investors —Report

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2 years ago

WITH the administration of President Bola Tinubu’s resolve to unify the exchange rate and advocate a lower interest rate environment, analysts believe that the Nigerian capital market is poised be the most favourable market segment for both foreign and local investors in the second half of the year.

It is expected that the new policies of the new administration, particularly the unification of the exchange rate and advocacy for a lower Interest rate environment, stand as a significant upside for the earnings performance of listed Nigerian corporates, which will bolster investors’ confidence toward listed corporates, particularly in half year (H1) and third quarter (Q3) earning seasons.

“Overall, we expect foreign exchange losses to remain a significant down risk to profit maximisation in some listed corporates. However, with the implementation of policies aimed at improving the overall economic output of the Nigerian economy amid the vast opportunities presented, we expect listed corporates to remain resilient in their earnings performance, with most corporates opting to switch to local sourcing of raw materials.

“This presents further opportunities for corporates as there exist tremendous incentives to increase investments in the local economy, sourcing raw materials locally and producing enough for exports,” United Capital Research said in its Macro Global H1 2023 Review and H2-2023 Outlook report.

The report recalled that the Nigerian stock exchange was met with a fantastic first half (H1) in 2023 as banks outperformed market expectations in their earnings performance, amid their exposures in Ghana’s fixed-income market.

Also, increased bargain hunting across large stocks like MTN Nigeria, BUA Foods and Dangote Cement, whose share prices appreciated by 33.2 percent, 108.9 percent and 16.9 percent, thus driving the bourse’s positive performance for the H1 2023.

Downstream oil and gas players also gained massive traction in Q2 2023, sponsored by the petrol subsidy removal, which improved their valuation.

Overall, investors’ traction for risk in H1 2023 also played a massive role with respect to their appetite for the equities market, supported by strong and resilient revenue and earnings performance.

It would be recalled that amid political tension, high inflationary pressure and scarcity of foreign exchange, foreign investors’ inflow in the stock market (NGX) dropped to N53.7 billion in Q1 2023 from N128.9 billion reported in Q1 2022.

Pension Fund Administrators (PFAs) contributed immensely to the liquidity of the exchange, improving participation by 14.9 percent in Q1 2023, from N908.0 billion in Q4 2022 to N1.0 trillion.

Some key factors that also contributed to the deterioration of foreign participation include elevated inflation rate, taxation of market instruments, especially, capital gain tax, a disincentive to investors, multiple taxation, foreign exchange losses, among others.

However, as foreign investors began responding to improved economic growth prospects and more friendly policies pronounced by the new administration, the NGX Domestic and Foreign Portfolio Investment Report for May 2023 revealed that foreign transactions rose by 337.6 percent month-on-month to N37.2 billion from N8.5 billion recorded in April 2023.

Foreign transactions accounted for 11.5 percent of total transactions in the month of May, up from 4.4 percent recorded in April 2023.

Looking ahead to the rest of H2 2023, analysts posited that listed corporates would continue to thrive as the new administration’s policies crystalise.

“It will be a “windfall gain” scenario, where corporates continue to improve their earnings performance, even amidst the intensifying inflation numbers. FMCG firms have the advantage of transferring cost burdens to consumers. Some premium brewers like Nigerian Breweries and Guinness Nigeria will continue to reap benefits from their premiumisation strategy.

“The banks will outperform in the second half, making them a choice sector to exploit in the Nigerian stock market (hinged on the CBN’s new orientation, which aimed at improving the liquidity of banks, via favourable policies),” the report said.

Speaking on the impact of the unification of exchange rates and the devaluation of the naira at the NAFEX window on the profitability of listed corporates, analysts believed that as evident in the Q1 2023 financial results of some listed corporates in the industrial goods and consumer goods sector, the crystallisation of foreign exchange losses is inevitable for companies that import their key raw materials.

The analysts said, “However, we have seen some of these corporates on a conscious path to reduce foreign exchange exposure by initiating projects aimed at sourcing key raw materials locally. Some Brewers like Nigerian Breweries (NB) have towed this path. In May 2019, Nigerian Breweries announced that it has achieved 57.0 percent of its 60.0 percent 2020 target for local sourcing of raw materials.

“In the FMCG sub-sector, Nestle disclosed in June 2023, an ongoing process set to develop local suppliers of vegetables and spices used in maggi products. Also, the company has plans to replace imported corn starch in Nigeria with cassava starch. This helped seven local suppliers boost capacity to meet the company’s supply needs.”

However, analysts projected foreign exchange losses to remain a significant down risk to profit maximisation in some listed corporates.

“However, with the implementation of policies aimed at improving the overall economic output of the Nigerian economy amid the vast opportunities presented, we expect listed corporates to remain resilient in their earnings performance, with most corporates opting to switch to local sourcing of raw materials.

Therefore, analysts forecast that the equities market will be the most favourable market segment for both foreign and local investors, however, noting that a strong incentive would be the cheaper naira, removal of multiple taxations and easy repatriation of FX by foreign investors.

“Overall, we anticipate a broadly favourable market for the equities market in H2 2023, supported by the above expectations,” the report said.

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