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Everything is Going Down in Nigeria Except Inflation



Dear Speculators,

The wait is over, we anticipated bad news and we got it. Our fears have become reality, the economy has continued to back slide and Nigeria has officially tipped into a recession. Not that this surprises anyone though. Falling oil prices, dollar scarcity, exploding oil pipelines, massive labour retrenchment and import restrictions have all contributed their fair share to weaken growth in Nigeria's economy. However, the stock market arguably has had it worse than the general economy this year as the market is currently down about 3.8 percent against an economy contraction of 2.06 percent in the second quarter. A closer analysis of the stock market brings to light some intriguing statistics.

The largest 49 companies in the stock market account for 97% of the total stock market capitalization. 41 companies of the 49 sell at an average of 22x earnings. Only 49 companies out of a total of 171 companies trading on the Nigerian Stock Exchange are valued above 10bn Naira. A total of 86 companies are currently valued above $10m in the NSE.

The All share index is down about 40 percent since mid 2014. However, only about 26 companies out of the 49 largest companies on the NSE sell below 15x earnings which shows that a good number of stocks are still fairly overvalued. This is not to say there their is still no value stocks available in the market, on the contrary we believe the market mispriced some securities during the market downturn. We advice careful stock picking among the 29 companies selling below 20x earnings out of the 49 large cap firms.

A recession is not the end of the world. Many oil exporting nations like Nigeria are witnessing an economic slowdown. Hopefully by next year, Nigeria will pull out of the recession but that may be followed by a period of prolonged slow economic growth. Economic policies have to be more accomodative for businesses to thrive. A massive infrastructural development project by all tiers of government and technology importation could be the factors that drive productivity in the economy and propel Nigeria to the heights it naturally belongs.

Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory

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