DESPITE the threat posed by the second wave of the coronavirus pandemic in the country, market experts have projected that in the short to mid term, the Nigerian stock market will enjoy the positive sentiments it closed the year 2020 with.
For the year 2020, equities investors in the Nigerian capital market had every reason to cheer as the value of their investments, as measured by the Nigerian Stock Exchange (NSE) capitalisation, went up by N8 trillion, despite challenging times occasioned by weak economic fundamentals.
Specifically, the market capitalisation rose by N8.098 trillion to close at N21.056 trillion on the last trading session, from the opening year figure of N12.958 trillion, while the the All-Share Index which opened trading for the year at 26, 842.07 rose by 13, 428.65 points or 50.03 per cent to close at 40, 270.72.
The Nigerian Stock Excvhage (NSE) thus closed the year 2020 on a grand note as Bloomberg ranked it the best performing Exchange in the world among 93 global bourses, having appreciated by 50 per cent in a year, despite the effects of the Coronavirus, End Sars protest, recession, among others.
However, with the second wave of the COVID19 pandemic, analysts remain optimistic that the local bourse is yet to end its rally. At Investdata, analysts says 2021 outlook is mixed. “… In the sense that it looks positive but dicey; considering the second wave of Covid-19, despite the ongoing discovery of more vaccines and its distribution. Government should make policies to encourage more listing to deepen the market in order to play its role of driving the economic development by providing platform for long borrowing, regulators should protect investors and collaborate with research companies to provide proper investment and financial education to attract more participant to the market.”
Speaking on his expectations for 2021, in a note to Nairametrics, Abiodun Keripe, Managing Director, Afrinvest Research said the equities market presents attractive opportunities for investors in form of capital appreciation and dividend return given the low yield environment in the fixed income space. He noted that the Nigerian stocks are currently undervalued and present an opportunity for growth in the short to medium term.
The current Return on Investments (ROI) in the equities market is positive with a Year to Date (YTD) return at 44.6 per cent compared to the inflation rate at 14.9 per cent, he said. “We believe stocks in the financial services (mostly banks), ICT, and the industrial sectors present strong prospects for growth given their resilience to the economic recession.”
However, analysts at Cordros Securities said mix of elevated liquidity, low interest rates, attractive dividend yield and earnings recovery argue in favour of an extension of the equity bull market into 2021.
In their report they said the performance in the fixed income market will be a tale of two halves, as they expect yields to remain in the low single-digit territory through first half (H1) of 2021 with a moderate uptrend to account for reduced market participation as investors seek yields in other asset classes.
“However, in the latter part of the year, we believe that a combination of weak market participation, revision of monetary policy to a tightening cycle, widening fiscal deficit, and fragile macroeconomic environment will lead to an increase in yields over 2021.
“Similar to the fixed income market, we also expect it to be a tale of two halves for Nigerian equities in 2021, with the market delivering further upside in the first half of 2021 before retracing slightly in the second half on an expected reversal in fixed income yields. The sources of risks remain plenty, the macro story remains uninspiring, and valuations are elevated,” they said.
Looking at some sectors of the market, the analysts stated that they are overweight on Nigerian banks as they expect a combination of strong dividend yield expectations and resiliency of sector players into the FY-21 financial period to support price performances.
According to them, in Nigeria’s cement sector, volume growth in 2021 will be modest due to the lingering impact of the pandemic on government finances and household income.
“Although the stiff competitive landscape coupled with soft industry conditions will deter industry players from raising prices substantially, we still see scope for marginal increases in prices,” they said.
The analysts noted that for consumer staples, it’s a mixed bag, while agriculture stocks are likely to benefit from improved volumes from new maturities. “However, the border reopening is a significant risk to pricing and by extension top-line growth.
“Brewery stocks are expected to record better volume growth in 2021FY, mostly due to the low base from 2020FY. However, the ability of brewers to increase prices above inflation remains constrained. Surging inflation and FX illiquidity will also put pressure on input costs and margins,” they said
They added that on Telecoms, there is a potential negative impact on Q1-21 revenues and earnings if the Nigerian Communications Commission (NCC) does not extend the NIN registration deadline and lines are disconnected.
At Cowry Assets, analysts expect that in the first trading week of the new year, bulls would retain their dominance as buying activities due to positioning for FY 2020 dividends which would likely suppress selling activities. However, they advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.