Economy
Is Equity Market Rally Sustainable?
The performance of the Nigerian equity market as measured by The Nigerian Stock Exchange All Share Index (NSE ASI) has been impressive since the beginning of the year 2017.
As at the close of trading on July 27, 2017, the NSE ASI had appreciated by 38.59 percent Year-to-Date (YTD).
A review of the performance of 15 major equity market indices in other countries shows that the NSE ASI recorded the best performance of 37 percent as at July 26, 2017, closely followed by GSE All Share Index (Ghana) at 34 percent.
The International Monetary Fund (IMF) in its World Economic Outlook (WEO) Update July 2017 edition, states that equity prices in advanced economies remain strong, and are showing continued market confidence about company earnings.
It notes that markets are also optimistic about emerging market prospects as reflected in strengthening equity markets and some further compression of interest rate spreads.
It however cautions that oil exporters provide an exception to this pattern, because of the dwindling oil prices since March 2017.
The big question in the minds of investors and equity market analysts is if the strong growth in the equity market since April 2017 is sustainable or if there is a bubble waiting to burst.
Our review of the Price to Earnings (P/E) multiples of the top 10 most capitalised stocks on The Nigerian Stock Exchange (NSE) as at July 27, 2017 shows that the companies traded at higher P/E multiples in July 2017 than in July 2016 and in July 2015.
The average P/E multiple for the companies increased from 11.46x in July 2015 to 12.25x in July 2016 and to 27.06x July 27, 2017.
Nestle recorded the highest P/E multiple of 78.87x in July 2017 and 34.91x in July 2015 while Nigerian Breweries recorded the highest P/E multiple in 2016 at 30.7x.
Although a high P/E multiple may indicate that investors believe in the future earnings growth of the company, the current trend in the market shows that stocks are trading far higher than the historical level and a possible correction may be imminent.
The monthly analysis of the NSE ASI shows that the equity market rally started in April 2017. The equity market appreciated between April and July 27, 2017 by 45 percent while it depreciated by 4.15 percent between December 2016 and April 2017.
The equity market followed similar trend between April and June in 2016 and 2017. The equity market recorded negative performance both in January and February 2017 at 3.12 percent and 2.72 percent respectively, with investors’ outlook that 2017 might be another bad year for equity market investment.
However, the fortune of the market changed in March 2017 with a month on month appreciation of 0.74 percent, April 0.95 percent, May 15 percent, June 12 percent, and 12 percent as at July 27, 2017.
YTD, the top gainers in the equity market as at July 27, 2017 are: May & Baker 245.74 percent; Fidson Healthcare 172.66 percent; Stanbic IBTC Holdings 150.00 percent; UBA 124.44 percent; Beta Glass 99.01 percent; Cement Company of Northern Nigeria 94 percent; Airline Services 91.20 percent; Okomu Oil 85.24 percent; FBN Holdings 78.21 percent; and Presco 77.06 percent.
Some notable factors that are responsible for the market rally are: improved business and consumers’ confidence in the economy, consistent improvement in the Purchasing Managers’ Index (PMI), stability in the foreign exchange market leading to the inflow of foreign investors, particularly with the establishment of the Investors and Exporters’ Foreign Exchange Window and the prospect of improvement in corporate earnings.
While we note that the improvement in the macroeconomic environment in the last few months has sustained the rally in the equity market, we think profit taking is imminent on a few stocks that have recorded strong appreciation in their share prices.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange rallied by 1.41 per cent on Wednesday, March 25, with the market capitalisation adding N35.04 billion to close at N2.512 trillion versus the previous session’s N2.477 trillion, and the Unlisted Security Index (NSI) expanding by 58.55 points to 4,198.85 points from 4,140.30 points.
The growth came amid a weak investor sentiment, as the OTC securities exchange recorded two price gainers and three price losers.
The advancers were led by Okitipupa Plc, which chalked up N25 to sell at N275.00 per share compared with the previous day’s N250.00 per share, and Central Securities Clearing System (CSCS) Plc grew by N7.43 to N86.37 per unit from N78.94 per unit.
On the flip side, FrieslandCampina Wamco Nigeria Plc lost N7.04 to sell at N101.13 per share versus Tuesday’s closing price of N108.73 per share, Geo-Fluids Plc went down by 9 Kobo to N2.89 per unit from N2.98 per unit, and Industrial and General Insurance (IGI) Plc dipped 3 Kobo to 50 Kobo per share from 53 Kobo per share.
Yesterday, the volume of securities rose by 135.6 per cent to 2.2 million units from 933,125 units, the value of securities increased by 2.4 per cent to N46.7 million from N45.6 million, and the number of deals grew by 27.6 per cent to 37 deals from 29 deals.
The most active stock by value on a year-to-date basis was CSCS Plc with 39.1 million units exchanged for N2.4 billion, followed by Infrastructure Guarantee Credit Plc with 400 million units valued at N1.2 billion, and Okitipupa Plc with 6.5 million units traded for N1.2 billion.
The most traded stock by volume on a year-to-date basis was Resourcery Plc with 1.1 billion units worth N415.7 million, followed by Infrastructure Credit Plc with 400 million units sold for N1.2 billion, and Geo-Fluids Plc with 132.9 million units transacted for N510.7 million.
By Adedap0 Adesanya
The value of the Naira fell against the Dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Wednesday, March 25, by N4.07 or 0.29 to N1,386.70/$1 compared with Tuesday’s closing price of N1,382.63/$1.
This was due to forex demand pressure without substantial supply from the Central Bank of Nigeria (CBN) and other sources. Lately, the central bank has not conducted any FX sales to eligible financial institutions, where Bureaux de Change (BDC) operators are allowed to access $150,000 weekly.
Also, in the official market, the Nigerian Naira depreciated against the Pound Sterling at midweek by N7.52 to close at N1,856.38/£1 versus the previous day’s N1,848.86/£1, and retreated against the Euro by N5.82 to trade at N1,605.80/€1 versus N1,599.98/€1.
The domestic currency further lost N3 against the greenback at the GTBank FX desk yesterday to sell for N1,391/$1, in contrast to the preceding session’s N1,388/$1, and at the black market, it depreciated by N5 to quote at N1,405/$1 compared with the N1,400/$1 it was exchanged a day earlier.
The prolonged conflict in the Middle East continues to heighten risk aversion, reducing appetite for emerging-market assets despite Nigeria’s attractive yield environment, which could help sustain offshore inflows and support the local currency in the near term, though structural challenges remain.
The country is making efforts that could help shield it further, including reviewing timelines for approval of resuscitation of moribund oil wells and boosting production, which accounts for over 60 per cent of FX earnings.
As for the cryptocurrency market, it was under pressure on Wednesday, as implied volatility and weakening suggest geopolitical risk concerns remain as macro headlines remain in focus.
Dogecoin (DOGE) depleted by 3.8 per cent to $0.0937, Solana (SOL) depreciated by 3.5 per cent to $89.10, Cardano (ADA) dipped 2.4 per cent to $0.2621, Ethereum (ETH) went down by 2.2 per cent to $2,117.47, Ripple (XRP) slumped 1.9 per cent to $1.38, Bitcoin shrank by 1.5 per cent to $70,012.58, and Binance Coin (BNB) dropped 1.4 per cent to sell for $634.82.
However, TRON (TRX) appreciated by 2.3 per cent to $0.3144, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) traded flat at $1.00 apiece.
By Adedapo Adesanya
The oil market slid about 2 per cent on Wednesday after paring deeper losses earlier in the trading session, as Iran reviewed a proposal by the United States to end the war that has disrupted global energy flows.
Brent futures fell $2.27 or 2.2 per cent to settle at $102.22 a barrel, while the US West Texas Intermediate (WTI) crude futures lost $2.03 or 2.2 per cent to trade at $90.32 per barrel.
It was reported that Iran was still reviewing a US proposal to end the war in the Gulf, despite an initial response that was negative, indicating that it had so far stopped short of rejecting it outright.
Pakistan delivered the 15-point proposal on behalf of the US government, and the consideration appeared to signal that at least some figures in Iran may be considering it.
Meanwhile, the White House Press Secretary, Mrs Karoline Leavitt, said President Donald Trump would hit Iran harder if it fails to accept that the Middle East country has been “defeated militarily”.
Currently, the market is facing the biggest-ever oil supply disruption as the US-Israel war has halted shipments of oil and liquefied natural gas through the Strait of Hormuz, which typically carries about 20 per cent of the world’s LNG and crude supply.
Market analysts noted that this has resulted in around 20 million barrels of crude losses daily, or some 500 million barrels, or five full days of global supply, since the war began on February 28. Countries have started rationing fuel use.
India, one of the world’s largest oil consumers, has bought its first cargo of Iranian liquefied petroleum gas in years after the US temporarily removed sanctions.
Meanwhile, Japan has called on the International Energy Agency (IEA) for an additional coordinated release of oil stockpiles, as it seeks to shield consumers from higher energy prices.
In Venezuela, oil production, including condensate and gas liquids, reached 1.1 million barrels per day in March.
Amid these developments, Russia’s major export terminals suspended crude oil and oil products loadings after massive Ukrainian drone attacks sparked blazes. At least 40 per cent of Russia’s oil export capacity has been halted following Ukrainian drone attacks on its energy infrastructure.
The US Energy Information Administration (EIA) said energy firms added 6.9 million barrels of crude into stockpiles during the week ended March 20.
That was higher than the build of 2.4 million barrels reported by the American Petroleum Institute (API) on Tuesday.
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