Bearish stock market mirrors Nigeria’s economic performance – Meristem
Obviously worried by the persistent bearish trend in the equity market, Analysts at Meristem Securities Limited, the capital market conglomerate has stated that performance of the market is a reflection of the impact of economic policies and political developments in the nation.
The leading investment securities firm said the Nigerian equities market largely mirrored that of the overall economy, rather than the earnings performance of the listed companies, even for those that had positive financial performances.
It however noted that there is an increased volatility around these periods which could lead to an uptick in market performance or otherwise, depending on the earnings expectations. The firm thinks that Nigerian bourse defies earnings expectation fever.
It said the relative attractiveness of the Nigerian equities market given a price earnings of (PE) 7.0x compare to emerging market average PE of 13.4x, has not been enough to keep the bears from the market.
“The prevailing factors such as slow economic growth, double-digit inflation which settled at 11.24% in September, and the political risks associated with the country cloud sentiment towards the Nigerian bourse”, Meristem stated.
It revealed in its assessment that ahead of 2018FY results, foreign and domestic investors took cover given the average performance of the firms in 9M:2018, wiping out the gains on the bourse and dragging the market return to -1.24% as at the last day of trade in March.
This represents a loss of 2.14% in March 2019 alone. The release of the results did very little to cheer investors as most firms only managed to marginally outdo the previous year’s performance.
Consequently, investors exited their positions at low prices, worsening the market conditions and dragging year-to-date returns to 7.22% at the end of April 2019.
Losses on the exchange continued to accumulate in the absence of robust fiscal policies to strengthen investors’ confidence in the market and the economy as a whole.
In the month of July, the equities market ushered in the first half results with losses dragging the year to date further southwards to -11.81%.
This is not to say that performances were out rightly terrible, but across sectors, single-digit revenue growth was prevalent, except for GLAXOSMITH (+15.95%) and ACCESS (+28.20%), resulting in price appreciation in the latter.
Analysts at Meristem reckoned that there is ample empirical evidence, that there exists a significant relationship between the earnings season and equities market performance, although the nature of this relationship differs across several markets.
“Buy the rumour; sell the news is an idea in the market whereby traders and investors take position in certain securities, in anticipation of a crucial market activity or event such as the earnings announcement or corporate actions”, Meristem noted.
Analysts stated that in developed markets, stock prices reaction to earnings announcement was shown to yield abnormal returns during the pre-announcement and post-announcement periods.
“For example, the earnings season has been one of the main drivers of the FTSE All Share Index which tracks the performances of over 600 companies on the London Stock Exchange).
“In the few weeks leading to the release of Q1:2019 financial results, positive sentiment pervaded the markets as investors took position in anticipation, which led to the FTSE ASX gained 1.46%.
It observed that earnings outperformed expectations, especially in the technology and consumer sectors, and as such, the positive mood in the market lingered.
The trend continued ahead of the release of the first half results, as the market gained 4.17% in the last few weeks in June 2019, it added.
Meristem said: “In the US equities market, the NYSE composite gained 2.27% ahead of the release of 2018FY and Q1:2019 results in the last two weeks in March.
“Following impressive earnings releases, the bullish sentiments in the market persisted, as the market hit year-high of 14.73% (13,060.65 points) in April.
“By mid-July, the three major indices were clinching record-highs as investors awaited the quarterly results from major companies”.
However, upon the retreat of Q2 earnings season, the NYSE Composite index was down 2.52% in August, dragging the year to date return to 11.98%, in line with investors’ rebalancing activities on counters that missed estimates.
It cited that in the United States, the hope of a trade war resolution between the US and China, coupled with the expected low yields in the fixed income space given talks of probable rate cuts by the Fed, prompted sporadic advancements in the equities market.
Likewise, the uncertainty over the UK’s withdrawal from the European Union, amongst other economic factors has spurred periodic decline in the prices of UK equities, analysts stated.
Downbeat Outlook for Third Quarter Earnings
Meristem is of the view that the challenging business environment, slow economic growth and Nigeria’s susceptibility to oil price volatility remains the key risks facing the country.
The analysts said this has led to the weak performances witnessed across the different sectors of the economy. In the oil and gas industry, high landing costs alongside capped product prices have limited profitability and growth.
Analysts note revealed that the CBN is tightening the noose on Banks with an array of regulations to spur credit to the private sector, a measure that could potentially increase the risk in the sector.
Also, in the insurance sector, the impending recapitalization exercise has kept industry players on their toes in a bid to meet up the stipulated capital requirements as at due date.
“The industrial and consumer goods sectors have been the most impacted by the tough operating environment and slow growth of the economy, analysts at Meristem observed.
Economic activities have been largely dampened by delays in the implementation of the Government’s capital budget.
Likewise, the increased competition and weak infrastructural spending have also hampered growth in the industrial goods sector.
Similarly, consumer spending has remained tepid since the exit from recession and this has led to weaker revenues for the Fast-Moving Consumer Goods players.
“In the light of all these, our earnings expectation in the third quarter is quite modest, as we do not envisage a reversal from the prevailing market conditions”, Meristem Securities limited said.
The firm added that many of the listed companies are currently in their closed periods ahead of the release of third quarter financial reports in a few weeks.
“Given our earnings outlook, we reiterate our recommendation that investors realign their portfolios to accommodate value and income stocks”, it added.
Bearish stock market mirrors Nigeria’s economic performance – Meristem
editor@dmarketforces.com
