By Cowry Asset
Having emerged from 2017 on the crest, the Nigerian equities space appears headed for the “goldilocks” state in 2018. This is premised on improving macroeconomic environment with lower inflation expectations coupled with sustained economic output growth trajectory.
Also, equities valuations are expected to remain cheap in the short term, occasioned by recent profit taking activities by investors who decided to lock in and realize their profits from the 2017 rally. Furthermore, the monetary authority has intention to ease policy rates this year in anticipation of significant disinflation which should improve the operating performance of businesses and further strengthen the case for investment in equities.
Meanwhile, the boost in global crude oil prices and improved crude oil production in the Niger Delta has mitigated foreign exchange risk and provided comfort to investors in Nigerian equities. There are wide expectations that crude oil prices would trend around USD55 to USD60 per barrel on the back of anticipated re-balancing of the crude oil market in 2018.
Another major exogenous factor that may also favourably impact on the local equities market include anticipated hawkish policies by the US Federal Open Market Committee in 2018 which will tend to scare off US equities investors given fears that increase in interest rates could have a negative impact on the operating performance of companies. US equities market is currently amongst the most expensive, at least in the advanced economies.
In the domestic economy, sector-wise, the local banking sector is expected to remain resilient in 2018 in spite of moderating yields. The banks are expected to improve margins by increasing their risk asset portfolio at lower cost of fund and cost of risk even as we expect the incidence of non-performing loans to moderate.
Banks are also expected to capitalize on moderating yield environment by issuing cheaper debt instruments in order to shore up their capital base and thus position themselves better to take on increased risk asset creation opportunities for enhanced profitability.
Therefore, banking stocks are expected to ride on improved banking sector operating performance.
Non-financial stocks are expected to receive a lift this year as moderation in interest rates should reduce cost of borrowing for businesses which is expected to their boost bottom line.
Also, measures by FMCG manufacturers to boost their backward integration strategy in order to lower input cost so as eliminate or reduce relatively higher cost associated with the foreign exchange risk of importing raw materials.
Construction companies as well as manufacturers of building materials are expected to leverage on and benefit from increased fiscal spending on critical social infrastructure such as roads, bridges and housing amongst other things.
Furthermore, expected moderation inflation rate is expected to boost purchasing power, especially of household, thereby increasing demand for consumer goods.
On the other hand, risk to equities market outlook may include uncertainties in the political space ahead of the 2019 general elections as investors adopt a cautious or sell and hold strategy which may negatively impact sentiments towards Nigerian equities.
Nevertheless, we believe that short-term price corrections will be an attraction to value investors and/or bargain hunters.
Adedapo Adesanya 
Dipo Olowookere
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