Recovery in the Equity Market in Sight?

By FSDH Research

Most investors in the Nigerian equity market did not smile during the first quarter of 2019 as the value of their investments dropped. And many are now asking if there is any hope of a recovery in the equity market.

Meanwhile, investors who took advantage of the high yields in the fixed income securities market in Q1 2019 are smiling to the bank. Election uncertainties, high yields on fixed income securities and risk aversion strategies adopted by investors made the equity market to record low patronage during the quarter.

Even after the election, the equity market has struggled to recover. This suggests that there were other factors that led to the drop in the market apart from issues surrounding the election.

The Nigerian Stock Exchange All Share Index (NSE ASI), the barometer which measures the performance of the equity market, dropped by 1.24% in Q1 2019. A few individual stocks, however, actually appreciated: this was unusual as large investors in the equity market rarely patronize most of the stocks which emerged among the list of top performers in Q1 2019.

The five top performing stocks in Q1 2019 by price appreciation were: Associated Bus Company Plc (+82.76%), McNichols Plc (+48.94%), Dangote Flour Mills Plc (+48.91%), Julius Berger Nigeria Plc (+36.82%) and Royal Exchange Plc (+31.82%).

The worst performing five stocks by price depreciation in the same period were: Academy Press Plc (-34.00%), eTranzact International Plc (-33.16%), Champion Breweries Plc (-27.14%), GlaxoSmithKline Consumer Nigeria Plc (-25.52%) and Unity Bank Plc (-25.23%).

The relatively stable exchange rate, decline in inflation rate and the appreciation in the price of crude oil on the international market could not lift the equity market from the negative territory in Q1 2019.

Our analysis of the financial performance of the largest ten companies by market capitalisation listed on the NSE shows that their combined revenue improved marginally by 4.31% in 2018 compared with 2017.

Their combined profit before tax (PBT) shows appreciable growth of 19.72% in 2018 compared with 2017. Our expectation is the outlook of the performance of quoted companies is better in the short-to-medium term than what was recorded in the last one to three years.

As the Federal Government of Nigeria (FGN) continues to pursue its inclusive growth agenda, supported by a favourable external environment in the short-to-medium term, the equity market should return to a path of sustainable growth.

While we believe that the growth projection in the Nigerian equity market is strong, we advise investors to adopt a long-term investment strategy in the market. They should also seek professional advice before they invest in companies. Despite the short-term volatility in the equity market, which can lead to a drop in the value of equity investment, investing in companies that have strong fundamentals will provide investors with a good return that is higher than the inflation rate over the long-term and protect against other short-term risks.

For investors who have neither the time nor the expertise to monitor their equity market investments and who still want to benefit from investment opportunities in the equity market, they can invest in any mutual fund in Nigeria that has exposure to the equity market.

Experienced fund managers manage these funds, and both the fund and the managers’ activities are regulated by the Securities and Exchange Commission (SEC) to protect investors’ interests.

If the current low yields in the Nigerian fixed income securities prevail, crude oil price remains above $70/barrel, exchange rate remains stable, inflation rate remains close to single digit, and government continues to develop structures that will improve the business environment, the equity market should record strong growth on a sustainable basis.

FSDH Research sees fairly strong growth opportunities in the following sectors: Consumer Goods, Industrial Goods, Banking, and Oil and Gas.

The following are our top stocks to watch: Dangote Cement, Dangote Sugar, FBN Holdings, Flour Mills, GTBank, 11 Plc, Nigerian Breweries, UBA, Zenith Bank, Access Bank and Seplat.