Contrary to the bright outlook projected by analysts for 2014, the Nigerian equity market’s performance year to date is a negative of 15.45% on the back of reduced foreign participation and weakened demand by domestic investors due to developments in the financial, political and global environments negative to growth of the market.
The market also suffered from the increase in security challenges facing the country especially the activities of the militants in the northern part of the country. Although the insurgency has a religious façade, it also appears to have political underpinning. And because the areas of the insurgents activities are quite father in the country’s hinterlands, business operations are not significantly affected. Overall, we believe that the insurgency will be effectively contained soon.
The unclear outlook for the economic due to the decline in international oil price and domestic oil production leading to fall in national revenue is another development that is affecting the market negatively. However, while this is currently challenging to Nigeria, we believe that it is transitory. According to an EIU forecast, the average price of Brent will be around US$97.6 per barrel for 2015. This is well above the budget break-even price of oil for Nigeria currently estimated at US$82.32 per barrel considering its average production and budget benchmarks.
The market also has good positives. The admission of NSE into the World Federation of Exchanges is a confirmation that the NSE has quality, transparency and world-class trading system in place. This should appeal to investors globally and attract more transactions to the market.
The channeling of liquidity to the productive sector by the Central Bank of Nigeria (CBN) would also help the market. The expected increase in financial intermediation will lead to increase in capital formation through improved performance of Nigerian companies and improved income to firms and household and by extension lead to significant upside potential for the capital market.
Nigerian equities are currently trading at attractive compare to regional peer and other emerging markets. Nigeria’s market P/E and P/B ratios compare favourably with the BRIC markets and its regional peer South Africa.