Dear Speculators,
As a result of the oil price crash, lack of economic policy direction since the 2015 elections and global economic instability, stock prices in Nigeria Stock Market have taken a serious beating. The bear market is still not over but the bull is not too far on the horizon. A lot of stocks in Nigeria are now priced below their fundamentals while some others can be considered to be fairly valued. As the GDP growth rate appears to be picking up steam after very weak growth in 2015 relative to previous years, the belief is that a lot of this growth will come from the publicly traded companies.
As a result of the oil price crash, lack of economic policy direction since the 2015 elections and global economic instability, stock prices in Nigeria Stock Market have taken a serious beating. The bear market is still not over but the bull is not too far on the horizon. A lot of stocks in Nigeria are now priced below their fundamentals while some others can be considered to be fairly valued. As the GDP growth rate appears to be picking up steam after very weak growth in 2015 relative to previous years, the belief is that a lot of this growth will come from the publicly traded companies.
If the economic policies of the
new government is anything to go by then the agricultural firms and
construction firms should perform considerably well in the coming years. The
decision by the Central Bank to reduce the CRR should increase loan creation
and investments in the country. This growth in the loan portfolio should help
the banks achieve higher net profits at the end of the financial year.
Some of the blue chip companies in the country are still relatively overvalued. It is necessary that investors conduct their due diligence prior to any stock purchase at this period in time. Dividend yielding stocks are the way forward now and great earnings per share figure should be on the radar of intending investors. Companies with large foreign denominated debt and companies that import raw materials or finished products from abroad should be avoided as a result of the current naira depreciation. Exporting companies in Nigeria should be considered as good buys as the Naira devaluation will help to increase their earnings.
Some of the blue chip companies in the country are still relatively overvalued. It is necessary that investors conduct their due diligence prior to any stock purchase at this period in time. Dividend yielding stocks are the way forward now and great earnings per share figure should be on the radar of intending investors. Companies with large foreign denominated debt and companies that import raw materials or finished products from abroad should be avoided as a result of the current naira depreciation. Exporting companies in Nigeria should be considered as good buys as the Naira devaluation will help to increase their earnings.
Small or growth companies should
be watched closely as the current economic issues may not favour small sized
companies. Investors should instead opt for well performing large-cap companies
with long term growth perspective. The NSE All Share Index may not be a good
mirror of current market performance at the moment as the 5 biggest companies
in Nigeria account for over 50% of the stock market capitalization. Fundamental
analysis should be carried out on a stock to stock, industry to industry basis
in order to find great undervalued companies. Late comers to the party will rue
their miss on current stock prices at the moment.
The global market is still
bearish with some major economies either heading into recession or are
technically already in a recession. Some European economies are already
adopting negative rates, Japan has joined in and USA may be next. It is yet to
be seen what the real effect of negative rates will be on the economy as there
are still no economic theories to explain such phenomenon. Most analysts
believe that negative rates may be an effective policy in smaller economies but
the opposite may be the case in bigger economies. The world's second largest
economy, China is still currently in serious economic and financial crisis. The
Chinese markets are still performing poorly, housing data is poor and national
debt is estimated to be over 30 trillion dollars. Debt to GDP ratio is almost
300% and a significant chunk (about 10-30%) of the debt could be non-performing
loans according to Legendary Hedge Fund manager Kyle Bass. The yuan was
recently devalued in a bid to increase exports. Still there is a lot of
optimism in the global financial markets beyond 2016 and 2017.
We are still uncertain as to how
significant the effect of the coming global financial recession will be on
Nigeria as a lot of hot money is currently out of the country. The naira devaluation
should usher in some of the hot money and lead to a slight overvaluation of
financial assets in the country. Early buyers in the market should profit from
this price increase within the coming year or two. A prolonged period of market
under performance usually leads to an even longer period of market boom.
We advice speculators to be very
cautious in their stock picks and apply strategic long term views on companies
in their analysis. We are bullish on the Nigerian stock market, we believe that
a currency devaluation is on the short horizon and finally we expect a
reasonable rise in oil prices to mid 40s and early 50s by year end.
Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
Signed:
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
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