Wednesday, December 09, 2015 7:00AM / Afrinvest Research
The Nigerian equities market has sustained a bearish run for most of 2015 as issues ranging from a fragile polity, foreign exchange restrictions, stifling monetary policy stance, weakening domestic growth and rising inflationary pressure have weighed in to weaken investor sentiment. While the victory of President Buhari at the polls boosted investor confidence between April and May, the five months of waiting before the eventual inauguration of cabinet on 11th November, 2015 has had a debilitating impact on the overall market.
Despite weaker macroeconomic fundamentals, the Nigerian equities market was undervalued compared to its emerging market peers before the new government was inaugurated. Market P/E as at 28 May, 2015 was at 12.8x relative to a peer multiple of 14.0x. However, with weak corporate earnings, as evident in the Q3:2015 earnings numbers, the deafening silence onfiscal policy direction and further monetary policy restrictions on FX, huge sell-offsacross the sectors between May and December, saw the equities market shed 20.3% (04/12/2015). Despite this decline, the much weaker earnings recorded has caused the market P/E to shoot up to 18.2x compared to the average for emerging (12.7x) and frontier (10.4x) markets.
As noted above, we believe investors are wary of equities due to a number of macroeconomic concerns relating to FX restrictions and operational bottlenecks of companies which translated into weak corporate earnings and declining Foreign Portfolio Inflow (FPI) into equities (down from US$956.2m in July-2014 to US$433.7m in July-2015). In our view, there are five major signals that will herald the change in market sentiments and garner investor confidence for equities. In the following sections, we analyze each of these signs ranging from fiscal pronouncements, removal of subsidy on petrol, infrastructure spending, accommodative stance on FX policies and economically viable states.
Click here to read more about the Signs