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Monday, 11 November 2013
Markets show resilience as stable naira aids real returns
Nigerian capital market is showing resilience as current stability in the nation’s currency, ongoing tight monetary stance and the reign of single-digit inflation are aiding real return on investments, helping to overshadow global and domestic policy concerns.
Inflation has moderated to a five-year low of 8 percent in September, its ninth successive month in single digits.
The naira also gained in the official spot market by N1.08 (in October) on the back of the Central Bank of Nigeria’s (CBN) hike in cash reserve requirements (CRR) for banks, which drained liquidity from the system.
The real rate of returns for investors is eroded by a fall in the local currency and higher inflation, so the relative strength of the naira and benign inflation year to date are a positive for Nigerian capital markets
This is reflected on the Nigerian Stock Exchange (NSE) All Share Index (ASI), which increased 2.8 percent in October and is up 33.9 percent for the year despite US Fed’s stimulus taper concerns and the CBN’s tight monetary policy.
Market capitalisation stood at N12.02 trillion (November 8), while Nigerian stocks are now valued at 13x estimated earnings, higher than the MSCI frontier market index (a benchmark gauge for markets with an average capitalisation of $34 billion) which has a multiple of 12.55.
Foreign Portfolio Investor (FPI) transactions, which accounted for 36.9 percent of total transactions in January 2013, rose to 49.93 percent in September, according to the latest stock exchange data.
“We see an attractive scenario for investment as the authorities believe firmly in offering positive returns in real terms,” Gregory Kronsten, analyst at FBN Capital Limited in London, wrote in a November 8 note.
“The main risk to this picture is not tapering, but a sharp fall in oil revenues. Our oil price projections suggest that Nigeria will escape this fate.”
Bismarck Rewane, CEO, Financial Derivatives Company (FDC) Limited, in a presentation made on November 6, said: “The market is now striking a balance with transactions almost evenly distributed between domestic and foreign investors.”
Foreign investors are coming back to Nigeria’s capital markets after exiting in recent months on anticipation of Fed taper of stimulus and from negative sentiment due to the US debt limit stand-off.
Renaissance Capital, an investment bank, says it is considering creating a fixed-income unit for sub-Saharan Africa as countries including Nigeria tap bond markets.
“Fixed income is a real opportunity in sub-Saharan Africa,” Clifford Sacks, RenCap’s chief executive officer for the continent, said in a November 6 interview in Johannesburg. “We’ll be looking at it in 2014 and the team could be based in London or Lagos.”
The nation’s robust economic expansion which is providing a healthy backdrop for companies to grow earnings is also helping to attract investor interest. Nigeria’s gross domestic product (GDP) growth for 2013 is projected at 6.2 percent by the IMF. It is expected to surge to 7.4 percent in 2014.
Stock market bellwether Dangote Cement reported an increase in revenues to N288 billion for the nine-month period from N224 billion in the year-earlier period as pre-tax profits surged 43 percent to N151 billion.
For investors in the fixed income space, Kronsten says the case for exposure to FGN paper is also strong. Yields on benchmark 10-year FGN bonds due 2022 closed trading at 12.50 percent on Friday, November 8, according to data from the FMDQ website.
“Yields should hold around their current range.” Kronsten said. “Domestic investors will, in time, track the positive inflation story while the offshore community will monitor the naira exchange rate.”