THE Nigerian equities market performance in the first half of the year 2023 was bullish to maintain the uptrend momentum from 2022, as the Year -to-Date (YTD) return of All Share Index (ASI) of the Nigerian Exchange Limited (NGX) settled at 18.5 percent by the end of the last trading activities in the first half of the year.
Considering factors such as the implementation of policy reforms, accommodative monetary policy and resilient corporate earnings, which could support buying activities in the second half of the year, analysts expect that the market would deliver a positive return of 25.8 percent in full year 2023.
While the local bourse reacted positively to the pronouncement made by President Bola Tinubu during his inauguration, and the unification of the FX windows, analyst at Cordros Securities believed sustaining the positive sentiments will depend largely on the perceived success of the government’s implementation of the reforms.
“While we acknowledge the precedence of a disconnect between pronouncement and implementation, we are cautiously optimistic about the effects of the president’s pronouncements,” analyst at Cordros said in its FY2023 outlook.
To support its FY2023 outlook, Cordros said given that the second half of the year is typically associated with the declaration of interim dividends, it envisages that investors will be looking to generate alpha and will flock into stocks with attractive upside potentials, especially as it envisages a better earnings performance from Q2 2023.
“Specifically, we expect an improved performance from the companies in the industrial goods and consumer goods sectors (particularly the brewers) and expect the banking, agriculture and telecommunications sectors to remain resilient.
“For the oil and gas sector, we believe the removal of the regulatory cap on PMS prices will be a positive marker for the earnings of players in this space, particularly the downstream operators. Overall, we believe any dividend rush will favour early-bird investors,” it said.
While acknowledging that the Nigerian market has rallied recently and is now near its actual value, it is still believed that the Nigerian equities market is undervalued at its current level, thus the projection of expansion.
“Currently, the NGX ASI trades at a P/E multiple of 11.0x, a 7.4 percent discount to its 10-year average of 11.8x, and a 17.6 percent discount to frontier market peers – MSCI FM (13.3x). We think the current valuation is unjustified, given that the market in recent times has continued to deliver strong earnings growth, indicating that it should be trading at a premium to its historical average.
“Indeed, the NGX ASI boasts a higher return on equity (19.7 percent) over its 10-year average (14.7 percent) and frontier market peers (16.3 percent), with its dividend yield also higher at 5.0 percent than its 10-year (4.7 percent) and peer (4.8 percent) averages.
“Furthermore, a fundamental breakdown of the components of the bourse indicates that most, if not all, regularly traded stocks are trading at levels below their fair value, though we acknowledge that current market valuations are now closer to analysts’ expectations given the recent rally in the equities market.”
Looking into this metrics, analyst retain their conviction that there still exists scope for an expansion of valuation multiples as long as corporate earnings remain resilient.
“While the NGX is undervalued and should be attractive to investors, especially at this moment, the fundamental issues that have caused the current FPI apathy remain amid the weak macroeconomic environment.
“While we commend the new administration’s stance and perceived efforts in resolving these issues, especially around current FX repatriation bottlenecks, we still think foreign investors need more convincing before returning in the droves needed to adequately support the Nigerian market.”
Cordros, therefore, projects that foreign investors’ participation in the equities market would pick up from current levels in the second half of 2023 but will remain far off pre-pandemic levels.
“However, for a return to pre-pandemic levels, we believe stability around the exchange framework and an improvement in key economic metrics will be decisive in re-attracting foreign investors.”
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