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By Emeka Anaeto

Still crystal gazing on 2017 at the backdrop of bearish stock sentiments in the first three weeks of trading, investment analysts are yet to be conclusive on the outlook for the current year.

Previous week the Nigerian Stock Exchange had given some indications that the market would do better than 2016 which was about the worst in history. But he had hinged this expectation on some happenings outside the market, otherwise the bear run would overrun 2017.

The most recent of the crystal ball gazing came last week from CardinalStone Partners Limited, a leading investment house based in Lagos.

According to their 2017 outlook, the equity market could be headed for another tough year with economic concerns surrounding foreign exchange market with weak corporate earnings continuing to downplay the attractive valuations of blue chip stocks.

They therefore stated: “We re-iterate the strong correlation of the Nigerian equity market to oil prices and with the price of Brent crude oil hovering around $55/bbl coming into 2017, we think losses will be less steep this year with the potential for a positive year close if the improvement in oil price reflects positively on Nigeria’s fiscal and currency crisis.”

kaduna market

The analysts expect market performance in 2017 to be dictated by conditions in the economic environment and anticipate that the following key events and factors will influence the performance of the Nigerian Stock Exchange this year;

*Decisive policy response to the country’s fiscal crisis

*Improvement in FPIs on the back of a sustained rebound in oil prices and improved FX liquidity

*MTN Listing

*FY’16 Dividend Capture

They also believe that a decisive policy response to the country’s fiscal crisis could set the tone for a bullish financial market.

Noting that significant market rebounds in the past were underpinned by serious economic reforms, the analysts at CardinalStone Partners feels that this would be the case going forward.

They stated: “A recent case study is the banking sector consolidation exercise when the market came off a downtrend to start an extended bull cycle as the consolidation took shape with most banks raising funds in the capital market a decade ago. This bull cycle was further sustained by two notable events; first was a landmark deal between Nigeria and her erstwhile creditor, Paris debt club in 2005. The deal, which granted Nigeria a 60% relief (US$20 billion) of her total debt to the club, spurred foreign inflows to the country and particularly to the Nigerian equity market, given the improvement in the country’s credit-worthiness.

“The second event was the reforms in the Nigerian pension industry, which started with the enactment of pension reforms act of 2004. This revolutionized the erstwhile ineffective defined-benefit pension scheme to a more realistic defined contribution pension scheme, creating a pool of investible funds for the capital markets. “By 2006, pension assets under management grew to N360 billion ($1.18 billion) and a chunk of these assets were subsequently invested in domestic quoted equity (2007: 29.68%, 2008: 20.27%).”

In the views of the analysts, any recovery in the economy and the equity market will hinge on more transparent and open foreign exchange activities in 2017, which would help to attract foreign inflows and reduce the pressure on the apex bank as the major supplier to the interbank market.

They also allude to a speedy implementation of the 2017 budget to support the recovery process, but warned that further delays as well as a continued absence of clarity regarding the exchange rate framework will exacerbate the recession and delay market rebound.

Foreign investors still hold the ace

CardinalStone analysts believe that foreign investors’ liquidity is inevitable for a sustained market rebound

They stated: “Foreign investor participation on the bourse was tepid in 2016, accounting for 40% of transactions (6-year average: 52%). We have witnessed softer risk appetite from international investors due to socio-political developments such as the UK referendum vote, and US presidential elections. These have no doubt deterred some investment.

“However, internal factors are more relevant; particularly, liquidity constraints in the foreign exchange market which has resulted in the extreme difficulty faced by many companies to repatriate earnings to their parent companies.”

The FMDQ reported a total turnover of US$76.7 billion (N23.39 trillion) in the FX market (including derivatives) for the 11-month period up to November 2016, compared to a yearly turnover of US$140.5 billion (N42.85 trillion) in 2015.

Analysts believe that given the commencement of a rate tightening cycle by the US Fed, many frontier markets will be vulnerable to capital outflows.

CardinalStone analysts stated: “Whilst we note that Nigeria, being the largest economy in Africa and a major frontier market, will continue to attract its share of frontier and African market funds, without a firm resolution on FX liquidity, foreign flows may remain around their current levels for much of 2017.

“Efforts to improve ongoing or announced reforms to boost liquidity have not seemed enough. The government has announced some measures to improve this condition, but directions have not been quite clear or satisfactory for the market,” they added.

The analysts also believe that a successful Eurobond offering in the first quarter of 2017 and the ability to attract funding in the form of concessional loans from multilateral agencies should boost confidence in Nigeria’s fiscal authorities and set the scene for a greater share of capital inflows.

The place of crude oil price

Also the analysts at CardinalStone Partners have tended to link oil price performance to Nigeria’s stock market performance.

They stated: “Using regression analysis on 20-year data of the Brent Crude and NSE ASI index, we establish that oil price movements account for about 70% of the variation in market performance. However, the market has mostly defied this correlation in recent times as macro-economic headwinds including tight FX liquidity, policy malaise, cost-push inflationary pressure and economic recession outweighed the benefit of the recovery in oil prices.

“That said, we think it will take a strong recovery in oil prices to drive the market in 2017. According to the International Energy Agency (IEA), global oil markets are expected to “move into deficit during the first half of 2017, with demand potentially outstripping supply by some 600,000 b/d, if OPEC and non-OPEC producers manage to stick to the historic output cut deal”. Success means the reinforcement of prices and revenue stability for oil producers after two difficult years. IEA’s projection of Brent Crude at $55/bbl by year end indicates a 23% recovery from 2016 average price.

“Thus, a 70% correlation suggests that amidst much volatility, the NSE ASI may potentially deliver 9% return in 2017 to 29,293 points. We note however that the NSE ASI/Crude Oil Price correlation has been weaker in recent times. Hence, the correlation will only play out if a major rebound in oil price directly translates into significant increase in FX liquidity and supply. This depends on a sustained improvement or recovery in oil production.”

The analysts identified other factors that would influence the performance of the stock market this year, principal one being an attractive dividend yields which would spur local interest in 2017.

They stated: “Whilst FY’16 scorecards are not expected to deliver fantastic numbers, we anticipate relatively more attractive dividend yields, particularly for Financials on the back of depressed valuations, which we expect will partly support market activity in Q1’17. Based on our expectation of FY’16 dividends, we envisage an average dividend yield of 10% for the banks in our coverage.

Stock recommendation

CardinalStone analysts concluded their crystal ball gazing with a focus on some promising stocks.

They stated: “Savvy local investors are likely to ride on this early in the year, paying particular attention to companies with strong earnings potential and consistent high dividend paying history such as GTBank, Zenith Bank, Access Bank, Fidelity Bank, Sterling Bank, United Capital and AfriPrudential Registrars amongst others. We therefore expect a soft rally towards the end of Q1 when companies are expected to release FY’16 scorecards.

“Typically, the rally will be short-lived except it is supported by monetary and fiscal stimuli measures to improve FX liquidity and transparency. If the status-quo persists, many banks will continue to face earnings erosion from rising non-performing loans even as the consumer goods sector continues to contend with depressed incomes and higher input costs.

“Downstream oil & gas companies will however be net beneficiaries of the recent subsidy removal; however, we see little impact on overall market sentiment given the relatively low standalone weight of the sector.

“The Industrial Goods sector is another bright spot given recent moves to finally tackle energy challenges (gas to coal initiatives) which account for a major portion of production costs.”



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