Capital market awaits govt policy direction

Uncertainty over policy direction from the new administration has continued to drag the performance of the nation’s capital market, analysts at Ecobank Capital have said.

The analysts, in their latest report on the Nigerian equities market, said the market performance recovered some of the losses posted during the first quarter of the year in the second quarter.

They said the Nigerian Stock Exchange All-Share Index advanced by 6.20 per cent during the second quarter to peg the year-to-date return at -2.70 per cent.

The analysts, however, said that as the euphoria surrounding the peaceful conduct of the 2015 general elections began to be replaced by the reality of over 40 per cent drop in government revenue and unclear policy direction, the NSE ASI shed 1.72 per cent in June.

They noted that the expectation was waned by macroeconomic, industry and company-specific concerns.

“Although it is apparent that anti-corruption is likely to form a major focus for the new regime, a great deal of uncertainty persists due to the little or no communication from the present government to the investing public on its economic policies,” the analysts said.

They said as the second quarter of the year neared close and half-year numbers were expected within the next two months, “we anticipate cautious position taking in companies with sound fundamentals and impressive first quarter performance.

“Overall, our expectation is tempered by general unfavourable economic environment, which could yield moderate positive growth in the banking sector and declining financial performance in the oil and gas sector.

They added, “We expect status quo to be maintained in the industrial goods and consumer space. While we are tempted to believe a turning point ought to have been reached by the end of second quarter following prolonged quarters of poor performance by companies in these industries, our expectation was dampened by the rising cost of power and depreciation in the exchange rates.

Noting banking stocks had posted strong recovery in 2015, the analysts highlighted the risks to banks, which could present some downside to their stock prices.

“The current low global crude prices have resulted into reduced USD flows (by as much as 50 per cent in our own estimation). This continues to limit banks’ ability to fund US dollar loan requests.

“Bank’s inability to move down the risk-curve could see net interest margins further contracting in 2015. We notice that 2014 NIMs contracted by 30bps. Cost of balance sheet funding edged up in 2014 with average deposit yields up widely by 80bps, mainly as a result of CBN’s unfavourable CRR regime in 2013 through to 2014.

The analysts noted that the consumer goods sector had suffered from unfavourable socio-economic conditions over the last couple of years, adding that the high level of depreciation in the naira meant industry operators had to source imported raw materials at an increasing cost.

“Due to the high elasticity of demand for their goods, the companies were unable to pass this cost to the final consumer. 2015 was expected to be the turnaround year as previous year’s performance has created a low base for comparison.

“However, this may not be the case. Insecurity challenges in some Northern state continue to hinder distribution to such areas. Foreign currency availability remains tightly controlled by the central bank.”

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Source : Punch

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