H2’18 Investors’ advisory: Partisan horse trading worsens equities outlook

But sentiment would remain better than pre-2015 election AS the first half/ third quarter corporate earnings season peaks and the shape of equities’ fortunes at year end begin to emerge we present again the last series in the batch of investors’ guide to stock pick and overall portfolio positioning.

This section is taken from the reports of analysts at Cardinalstone Partners Limited, a Lagos based investment house which they titled, “Nigeria Outlook – Navigating the Tide”. They released the report last weekend, and its equities section has the following propositions: ‘Equities: The bears come out to play’ Despite the improving macroeconomic sentiments currently playing out in the country, we expect activities in the equities market to remain lethargic for the most of second half 2018, H2’18, largely due to a spill-over from the current widespread bearish sentiments being experienced across emerging and frontier markets, and partly due to investors’ jitters on the back of upcoming 2019 presidential elections. Upcoming elections Historically, statistics show that the period preceding the elections in Nigeria experiences the highest exit of foreign investors from the market and thus, we do not see a deviation from this trend with the upcoming elections. The exit of investors from the market towards the end of H1’18 has dampened the mood of the market and at such we expect sentiments to remain depressed in H2’18 despite the country’s present positive macroeconomic buffers. Election jitters may depress foreign inflows in H2’18 As the upcoming general elections approach, heightened tensions amidst warring political factions have led to inevitable market pressures and as such we expect that the performance of the local bourse in H2’18, to a great extent, will be influenced by the tone of the political environment in the coming months. Coalitions between warring political factions to produce a formidable presidential opponent has heightened fears of political instability and thus, we expect trading activities in the equities market to remain weak in H2’18 as investors are likely to stay cautious pending the election outcome. However, we do not expect to see the extreme bearishness observed in the 2014 pre-election period which was exacerbated by the drop in crude oil prices.

Hence, despite our expectations of heightened cautiousness in the equities market in H2’18, we believe that performance during the period will swing between marginal gains and marginal losses as opposed to the steep decline observed in 2014. MTN listing may throw upside MTN’s impending listing is expected to spur trading activities if the Initial Public Offering, IPO, goes through in H2’18. The much-anticipated Initial Public Offering of MTN, one of Africa’s largest telecommunications companies and the largest in Nigeria with about 40.7% market share (over 65.2 million subscribers as at June 2018 according to data from the Nigerian Communications Commission), is expected to boost trading activities in the equities market if it goes live in H2’18. The offer, with a projected size of between $400 and $500 million (24% to 30% of the company’s total equity) promises to expand entry into the ICT industry.

With the listing of MTN Nigeria, the ICT sector would be another large cap sector on the local bourse, which will in turn help improve market depth, and increase the Nigerian Stock Exchange, NSE’s market value. We expect the IPO to boost investor confidence in the Nigerian market as a viable and growing market. However, we cannot rule out the possibility of a delay in the IPO listing until after the elections because market conditions may be unfavourable prior to the elections as investors remain on the side-lines. Our expectations for this IPO is further dampened by the growing aversion for emerging and frontier markets’ equities on the back of heightened global economic tensions. Current valuations offer attractive entry point for daring investors Despite improving macro-economic fundamentals and better earnings outlook for listed companies, valuations of counters on the exchange has continued to decline as investors shun emerging and frontier markets particularly Nigeria on the back of heightened political risks.

However, we think currently attractive valuations provide strategic investors good entry points to cherry pick fundamentally sound stocks in anticipation of the recovery when political tensions abate. From a relative valuation stand point, the Nigeria market currently trades at a discount when compared to its peers. At a P/E of 10.7x, the equities market is undervalued compared to Johannesburg Stock Exchange, JSE, and Morgan Stanley Capital International, MSCI, frontier market index with P/E of 17.7x and 14.1x respectively.

Hence, whilst we remain cautious on the performance of the equities market in the immediate term largely due to political uncertainty, we are optimistic of better performance in the mid to long term.