The 2020 financial year followed two (2018 and 2019 financial year) successive years of bearish close. The market began the year on a positive note resulting in the rise of the NSE ASI to 29,710.56pts on 20 January 2020. This was followed by panic selling following the outbreak of the corona virus and its attendant effect on oil prices, before high system liquidity and depressed fixed income yields forced traction in the equities space, resulting in the rallies that led to a positive close.
The year 2021 has begun on a positive note with the ASI returning +4.71 YTD (28 January). The question on the minds of most investors remains the sustainability of this rally till the end of the year. Though the 400 days relative strength index signifies that the ASI is overbought, we are of the view that the dearth of alternative investment options amidst high liquidity in the system could lead to a positive close for Nigerian Equities.
In the external economies, we expect that central banks would continue to prioritize expansionary policies; hence, emerging markets would keep its interest rate differential advantage amid the rising risks profiles in the market. Furthermore, we expect the activities of OPEC+ and the expected drop in shale production to engender modest accretion to Nigeria's foreign exchange reserve resulting in better stability of the exchange rate in 2021e.
Although not at an alarming rate, we expect yields in the fixed income space to trend a little upward in the second half of the year if solely left to market forces as liquidity pressure on the financial system emanating from OMO maturities subsides.
However, valuations are less compelling considering the local bourse now trades at a PE ratio of 16.05x. Nonetheless, the strength of financial system liquidity and the dearth of investment options provides a glimmer of hope that the market will remain upbeat. Moreover, valuations of stocks in some sectors remain cheap.
In our view, we believe the factors that would determine the path of the market in 2021, have expanded beyond oil price, monetary policy and the external economy to include financial system liquidity, yields in the fixed income space, corporate performances and corporate actions.
That said, despite significant gains witnessed in 2020, we believe valuations of many stocks remain attractive. Within our coverage universe, we retain Buy ratings on UBA, Access, Zenith, Guaranty Trust Bank, FBNH, Dangote Cement, MTNN, Flourmills and Dangote Sugar. Essentially, we anticipate that for as long as buying interest in the market is sustained, we expect a re-rate of these stocks.