| Proshare Confidential |    6402 VIEWS  |
| Proshare Confidential | |
| 6402 VIEWS | |
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Monday, January 20, 2020 / 07:00 PM / By Proshare
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Executive Summary
The Warren Buffet quote is particularly important
at a time of growing uncertainty in global financial markets. The Nigerian financial market in 2019, for instance, saw a two-track development of equity
prices slumping and treasury yields rising for the better part of the year.
Investors (especially foreign portfolio investors (FPI's)) on witnessing a
softening equities market piled into the fixed income market with enthusiasm as
domestic treasury yields at between 11.5% and 14% stayed ahead of average
annual inflation rate until November 2019 when inflation rate rose to +11.85%.
The Financial Market in the previous year saw mixed
developments ranging from declining stock prices for large-cap stocks (the
Nigerian Stock Exchange's All Shares Index (ASI) lost -14.60%
in value by the end of the year), H1 growth in treasury yields (until Q4
2019) and a mild devaluation of the naira in foreign exchange markets (the
N/US$ rates fell from N360/US$ in Q1 2019 to N364/US$ in Q4 2019 at the NAFEX
window and from N305/US$ in Q1 2019 to N306.4/US$ in Q4 2019 at the official
window). The consequence of the various market actions in the year was that
investors became increasingly ambivalent about where to keep their surplus
funds. While some bailed out of the equities market and stayed close to cash
others went into government treasury instruments.
Indeed, by H1 2019 up until Q3 of the year,
investor's obvious choice for investible funds was government-guaranteed
instruments, especially as the inflation rate had started declining to a
one-year low of +11.02% in August 2019,
which was +0.35% lower than the +11.37% in January. The real estate end of the Financial market saw modest growth in the year mainly as a result of declining
international oil prices. A review of the sector in Nigeria showed that the
market tended to strengthen when international oil prices rose and weakening
when oil prices dipped. The relationship between the sector and oil prices
appears to be that low oil prices hinder GDP growth and higher oil prices promote
faster GDP growth. The faster growth of GDP seems to lift 'all boats,' including the real estate sector.
Into The Deep
In this year's report of the Nigerian Financial Market for 2019, a variety of market plays were analyzed, ranging from equities to fixed-income securities, mutual funds and real estate investments. Section 1 of the report reviews developments in the global economy, noting the impact of the Sino-US trade conflict on global growth rates and international oil market prices. It notes that most developed countries have adopted various forms of quantitative easing to stem recession headwinds. Following these advanced economies, some emerging market countries have also cut interest rates to stimulate domestic growth. The International Monetary Fund (IMF) had forecast growth of +1.7% for advance economies in both 2020 and 2021. The international agency also forecast that the USA would likely show a growth rate of +2.4% in 2019 and +2.1% in 2020. The Eurozone area is likely to see much slower growth in GDP, estimated at +1.2% in 2019 and +1.4% in 2020.
Africa In Perspective
Section 2 of the report looks at African economies and
highlights the mixed economic performance across the continent. The report
observes that African economies are increasingly shifting from
consumption-based economies to investment-based ones. African economies in 2019
showed the following:
The continent was expected by the African
Development Bank (AfDB) to grow by +4.00% in
2019 and +4.1% in 2020. However, the recent
World Bank report released in January 2020 has a different perspective. It
expects Sub-Saharan African economies to grow by +2.1%
in 2019 and +2.9% in 2020. Three of
the largest economies on the continent, Angola, Nigeria and South Africa, were
and will continue to be a drag on Africas' growth in 2020.
The equities market performance of the continent
has been mixed, with some surprises. In the category of surprises, Zimbabwe, a
country with severe inflationary challenges and fiscal difficulties, saw its
Stock market grow by + 56.12%. Less
surprising was the growth of the Kenyan Stock Market which rose by +17.79% on the back of a +5.56%
growth in GDP between 2014 and 2018. South Africa's market despite rising
unemployment, power outages and slower manufacturing sector growth, was able to
rustle up a market growth of +11.19%. In
contrast to South Africa's good equity market fortunes, Ghana saw its equity
market slide by -12.53% despite a growth in GDP
of +5.6% in Q3 2019 and judging by a recent
World Bank forecast for 2020, is likely to grow by +6.8%.
The Nigerian equity market toppled by -14.60% in
Q4 2019, struggling in the face of slow GDP growth with Q3 2019 GDP growth rate
at +2.28%. High domestic bond yields in the
fixed income market meant that investors dumped equities for higher risk-free
returns in government treasuries.
A Bird's eye view of Nigeria's 2019 Economic
Growth
Section 3 of the NCM report took a snapshot of economic
growth and development in Nigeria in 2019. The report noted that the growth
rate of GDP was +2.28% in Q3 2019 and
forward forecast for full-year is equally below +2.50%.
Analysts expressed concern about the slow growth rate of the economy as the
population growth rate is still progressing at +2.6%
according to the 2016 population survey. The fall in the country's GDP
per capita suggests rising levels of absolute poverty and savings and
consumption. Perhaps, on the good side was the rise in the country's
agricultural sector contribution to GDP from 21.89%
of Q1, 2019 to 29.25% of Q3, 2019. However, 2019 saw a fall in non-oil sector contribution to GDP from 90.78% in
Q1, 2019 to 90.23% in Q3, 2019, while oil sector contribution increased from
9.22% to 9.77% Q3, 2019. The rising importance of the oil sector to GDP belies
the Federal Governments' efforts at diversifying the economy away from oil.
The inflation rate from January to
October ranged between +11.0% and +11.61%. The recent rise in the inflation rate to +11.85% resulted from the closure
of the country's land borders and forex exchange restriction on selected
commodity imports. The central bank had said that Community
development initiatives would help combat the rise in inflation and serve as a
cushion to the adverse effect of the closures of borders. The community
development initiatives to finance the agricultural value chain of ten ((10)
commodities, namely, Cassava, Cocoa, Cotton, Rice, Tomato, Poultry,
Livestock and Dairy, Fish, Oil Palm and Maize, which has received N171.66bn
in funding. Four of these crops received over N140.12bn or 81.6% of total
disbursements (Cassava, N11.44bn; Cotton, N40.47bn; Rice, N53.40 bn; Oil palm,
N34.81bn).
Economic growth in Nigeria in 2020
will still largely depend on the international price of oil and would require
policy adjustments to domestic subsidies and foreign exchange policy.
2019: A Harsh Year for Equities
Section 4 of the report
reviews equities market performance. The report looks at the Nigeria Stock
Exchange All Shares Index (ASI) performance on a monthly and quarterly basis.
The section also analyzes the markets trading statistics for 2019, looking at
the market's highs and lows, and the performances of so-called "penny" stocks. The section takes a look at stocks that were listed and delisted
in the year while also reviewing the outlook for selected sectors.
Risk-Free Freedom and Rewards
Section 5 of the report
reviews the performance of the fixed income market and comments on the market
outlook in 2020. It reviews the state of Treasury-bills, Eurobonds, Fixed
Income and Currencies (FIC), savings and other deposits and foreign exchange
transactions (FX). The section explains the yields that occurred in the fixed
income market and the sharp change that happened in Q4 2019 when the Central
Bank of Nigeria (CBN) changed the rules of participation in open market
operations (OMO).
Discovering Other Assets
Section 6 of the report
looks at other financial asset categories and reviews the performances of
mutual funds, the real estate market, derivative market, commodity market, and
currency market. With equity prices falling and bond yields flattening,
investors obviously looked into alternative assets to protect their portfolio
yields, unfortunately not much solace was found in other asset classes as the
general downturn in the economy affected other markets to a varied extent.
Rearview Foresight
Section 7 of the NCM
survey took a decade-long detour to analyze market performance since 2010. The
equities market performance over the last decade varied with the market
tumbling four (4) times and rising five (5) times, implying uneven value growth
and high potential market risk over the last decade. The market's
performance appeared tied linearly to the international price of crude oil and
the rise and fall in dollar-based annual fiscal revenues. When oil prices rose,
the NSE ASI also went up but when prices fell, the ASI took a tumble,
suggesting that international oil market conditions serve as good predictors of
domestic stock market performance, at least in Nigeria. The fixed
income securities market did better than the equities market in the last
half-decade with the Fixed income marketing rising consistently in the last
three of the past four years. Fixed income market turnover increased by +24.97% in 2017 and +28.75% in 2018 before
moderating to +6.43% at the beginning of Q4 2019. The mutual funds market's net asset
value (NAV) showed a similar pattern over the last decade with NAV rising by +90.39% in 2017 and +48.41% in 2018 before
bouncing back up to +56.11% in 2019. The year 2020 market performance will equally be
determined by external factors in the trade and oil markets as much as domestic
fiscal and monetary policy.
Strengthening Governance; Fashioning
Rules
Section 8 of the report
reviews major regulations and rules by different financial regulatory agencies
in 2019. The largest number of regulations churned out in 2019 was by the CBN
which introduced guidelines for credit concentration, management of interest
rate risks, reputational risk and stress testing of domestic money banks
(DMBs). The money market regulator also introduced other guidelines in respect
of bank loan to deposit ratios (LDRs), risk-weighted assets (RWA) and capital
adequacy ratios (CARs).
The CBN introduced regulations of
Bankers Acceptances (Bas) and Commercial Papers (CPs) amongst a few others. The
Securities and Exchange Commission (SEC) released its exposure draft for a
review of the Investment and Securities Act 2007 (ISA 2007), in addition to new
rules for Issuers of securities and dealing members. The Asset Management
Company of Nigeria (AMCON) equally saw a 2019 amendment to its Act to broaden
the loan resolution agency's powers. The FMDQ Exchange in collaboration with
the CBN, developed the Fixed Income Securities Investment Clients Services
("FISICS") Guidelines in February 2019. The NASD also saw SEC approving new
rules for executing negotiated deals on the NASD OTC. The various reviews of
guidelines and regulations in 2019 were to ensure a more transparent, efficient
and governance-driven financial market.
The report shows that at continental
and domestic financial market levels, economic and financial managers have
gotten a few things right and some things wrong, but as Warren Buffet had
admonished, what is critical is that the number of things gotten right
outweighed the things done wrongly.
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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