The Capital Market: Facing Uncertainty and Grabbing Opportunities

Proshare

Thursday, February 14, 2019 6:30AM /Proshare Research

 

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Nigeria’s capital market went through 2018 with a deep sense of uncertainty as fiscal and monetary policies conspired to keep manufacturers under pressure and put a fist over retailer profits as corporate Nigeria saw a significant earnings dip. A repeat of this sad performance is likely to occur in 2019 as the government tries to check inflation and reduce its debt- to- revenue ratio. This may lead to a number of outcomes:

  • Higher interest rates will increase money market yields and result in money market mutual funds lifting investor’s net asset values (NAVs). Bond prices are likely to go down in secondary markets as coupons stay at double digits, settling  between +15 and +17%. Equity Mutual funds will see NAVs fall as the market remains largely flat on tough outcomes riding on the back of fiscal and monetary restraint measures. Mixed Mutual Funds are also likely to be poor investments to park cash in 2019. 
  • Bonds market will see increased activity as investors shift from the laggard performance of equities to more attractive returns of fixed income investments. Yields in the fixed income market will range from 15 to 17%, while overall stock market yield for a market mirroring portfolio with a Beta of close to 1 may rise only slightly above 2018’s -17.81%.

Proshare Nigeria Pvt. Ltd.

Source: Africa markets, Proshare

  • Forex market will prove of strategic importance to investor’s portfolio as the Naira to Dollar exchange rate remains fluid over the twelve months of 2019 as the first half of the year (H1) will be characterized by pre and post 2019 election anxiety. This would see mild fluctuations in the exchange market creating strong arbitrage opportunities for savvy speculators. The second half (H2) of the year should see a less frantic market and a more stable currency outlook. If oil prices hold up at $60 per barrel, the Naira to Dollar exchange rate will remain flat, but if average oil prices settle below $60 per barrel the CBN will be under pressure to defend the domestic currency or allow some measure of depreciation. This would involve dipping into the nation’s foreign reserves as excess crude account (ECA) becomes depleted.

Proshare Nigeria Pvt. Ltd.

Source: Central Bank of Nigeria

 

  • NASD OTC market for equities saw a hitch in performance in 2018, but traders have expressed optimism over activities in 2019. They believe that the key drivers of positive momentum in the market during the year will be:

1.       Stronger global economy

2.      Stable global oil prices

3.      Good performance by top securities across market segments

4.      Independent web-based trading platform (BiTS) for brokers aiding remote trading from any location in the world

5.      Increased stability in the foreign exchange (FX) market

However, some downside risks have been noted which include:

1.    Economic uncertainty as a result of upcoming general elections which may likely put investors on edge

2.  Contraction in the country’s oil sector leading to slower pace of growth and foreign exchange fluctuations

3.  Possibility of falling fixed income market prices (rising global interest rates, rising inflation) creating an attractive alternative investment for investors in the secondary market

4.   Interest rate hike in the US and escalation of global trade wars may cause foreign investors to take flight.

Investors in the year 2019 will have to deal with the relatively easy task of hedging against financial risk and the infinitely more complex task of coping with the vagaries of human sentiments in global markets. Shifts in prices of global commodities; appeasement of large and pugnacious egos in global trading markets and the small but pertinent issue of who become national leaders in countries like Nigeria, South Africa, India, Ukraine, Afghanistan and Argentina in 2019, will dictate the rise and fall of economies. If there ever were times that tried men’s souls in financial markets it is now.

 

Do feel free to share your opinions/observations and feedback with us vide content@proshareng.com and/or research@proshareng.com

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.


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 Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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