Nigerian Equity: When and What to Buy/Sell

The Nigerian Stock Exchange, Lagos, Nigeria

The markets are strongly correlated to global crude oil prices and explains the sustained sell-off we have witnessed in the markets. Crude oil accounts for 75% of the country’s revenue and 95% of foreign exchange. With prices falling, reserves are under pressure and the ability of the CBN to continue to stabilize the naira is at risk. The capital markets are largely driven by foreign portfolio investors who account for about 70-80% of the transactions. They see the uncertainty in crude oil prices increasing following the actions by Saudi Arabia in cutting prices and the increasing supply of shale oil from the US.

Also the build-up to the upcoming general elections in Feb 2015 is weighing down on investors outlook on Nigeria. While the two main contestants for the office of President has emerged, uncertainty still looms around the final outcome of the elections and effect of the results post-elections. Jonathan’s campaign has been on continuity and completion of his “transformation” agenda while Buhari has campaigned on eradicating corruption and on his track record as an honest leader. Citizens and investors are nervously waiting on a major inflection point in Nigeria’s history.

Fundamentally, company earnings over the last 9 months didn’t help matters. Weak results posted put a damper on expectations as investors begin to realize that the overall economy might not be as strong and not growing as fast as expected. Consumer spend is under pressure due to increasing electric tariffs, price inflation in certain goods, zero lending, high unemployment, and no wage increase since 2011. Also, we are yet to see the pre-election flows of funds into the economy (which has impacted the cement companies and infrastructure/construction sector). Finally, the CBN has not helped with its back-to-back circulars that have material impact on the banking sector. With the volume of “Hot” money in the equity markets, we saw quick and strong sell-offs in banking stocks in reaction to the circulars.

The Nigerian story has become a Macro driven event. Nigerian stocks are cheap at current levels particularly when compared to emerging/frontier market peers, the performance of the market in 2015 will be driven mainly by external as well as political and macro-economic factors. We see the bearish sentiment continue into 1Q15 driven by oil price volatility and heated political environment.

Post-election, and after earnings release in May, we should see a turn-around. We believe buying opportunities exist particularly in blue chip companies that have strong market share and hedged or limited exposure to forex risk. Trying to locate the bottom of the market will be an exercise in futility. Investors should look for stability and rally in crude oil prices (week over week growth, +5% uptick) then begin to take solid positions. Nigeria is a LONG term play, as we expect the favourable demographics to drive long term economic growth and continue to attract foreign portfolio investments looking for alpha.

Source: Primera Africa Securities Limited