Financial markets, economic outlook bearish amid politics, conflicts

Financial analysts are of the consensus that economic and financial markets outlook for the second half of 2018 is bearish on politics in the run up to the 2019 elections and the raging religious and communal conflicts in the country.

The assumptions for the outlook, however, exclude improving macroeconomic environment and seeming policy stability. The analysts opine that Nigeria’s finan- cial markets would likely be steered by the fallout of electoral activities and rising global interest rates.
Particularly, the equity market, already hit by pre-election jitters, with foreign inves- tors moving to the sidelines, is expected to perform tepidly in H2’18, even as compa- rable multiples with peers suggest the Nige- rian equity market remains undervalued.

“A look at where Nigeria’s equities market is trading now in comparison with countries like Ghana, South Africa and other emerg- ing markets, you will see that the market is about 20 to 30 percent undervalued.

“In that light, you will believe that there is value in Nigeria’s market. We have always believed that the economic fundamentals will continue to drive market sentiments and that is something that we have seen in the first half of the year,” ac- cording to Olalekan Olabode, head research at Vetiva Capital.

He added that because a good part of our market is controlled by foreign investors, who analyse the market from a top-down approach, expectations of enduring weakness in key sectors, delayed budget pas- sage, and unexpected disruptions to oil production, may not aid macro developments in offering much support to the equity market in the second half of 2018.

“If you look at the economy, it looks as if it’s brighter than we were last year and two years ago. Oil prices are stronger, FX is relatively stable and things are improving generally but compared to where we were at the beginning of the year, our ex- pectation for the economy is slightly lower. We had expected that we are going to see a rate cut sometime this year, but it’s something we consider no longer visible,” Olabode said.

Vetiva, however, maintains a strongly positive post-election out- look on Nigerian equities.

For Robert Babatunde, head research at Afrinvest, optimism on the equities market solidifying gains are low, rather the researcher says the expectation is less optimistic for the second half where we had thought market to shed some of the gains unfortunately year-to-date returns have been hovering the negative territory lately.

“There are going to be oppor- tunities to see price appreciations; however, we won’t be as bullish as we were at the beginning of the year, given what is playing out at the global markets,” he said.
Speaking on the kind of encour- agements to expect from the fiscal authorities to spur financial market movements, Babatunde said as much as it is exciting to see the budget number of N9.1 trillion, “we are not so optimistic about the ca- pacity of government to execute the budget in light of the revenue fun- damentals of the government.”

He explained that a line item like other financing sources, which is a major source of revenue for the budget, when estimated alongside other realities amounted to N3.6 trillion for 2017 full year while the government is projecting to make as much as N7.3 trillion in terms of revenue.
In his opinion, such projection is overly optimistic and the current fundamentals may not support that. He, however, noted that privatization for most of the key assets was the way to go, advising government to move away from the socialist approach. He said this move would stimulate the much desired growth when the government takes off its hands from businesses and allow markets to stimulate growth.

According to Vetiva Capital’s Nigeria 2018 half-year outlook, titled “In the shadow of the polls” Nigeria’s 2018 economic performance has been weaker than expected.

Nigeria’s economy grew by 2.0 percent year-on-year in the first quarter of 2018 as against consensus expectations of 2.6 percent, which was dragged by a few key sectors.

The analysts consequently downgraded growth expectations for the country’s 2018 full year to 1.9 percent from a previous 2.4 percent on weak Q1’18 performance and concerns over oil production.

Although moderating inflation, stronger than expected oil prices, and anticipated robust aggregate demand spurred by pre-election activities is cheery news.
They foresee a constrained fiscal stimulus in the course of the year in light of the late passage of the 2018 Budget, which they said will no longer expect monetary easing in 2018.

“Overall, we retain our positive economic outlook, albeit slightly dampened, for the rest of the year. Furthermore, contingent on a smooth electoral process, we are more positive about the post-2018 economy as wider aggregate demand recovers and forecast GDP growth of 1.9 percent and 3.2 percent year-on- year in 2018 and 2019 respectively,” the Vetiva analysts noted.

The analysts anticipate stronger earnings across coverage sectors in the second half of the year, adding that the banking sector, will see the most value in tier 2 names as earnings recover from recent lows, driven by modest real loan growth, moderating loan losses and contained operating costs.

“For the wider sector, pressure from lower yields on government securities and a likely moderation in derivatives income will be offset by a recovery in loan growth and expected an increase in transaction velocity from improved economic activities.

“We forecast higher revenues across consumer goods names as recovering volumes compensate for price cuts, and expect the sector to benefit from recent deleveraging and moderation in funding costs.

We have a similar strong volume outlook for the Industrials Good sector, in line with Q1’18 trend, and on the back of expected government infrastructure spending at the tail end of the year.

Finally, we expect strong oil prices and production to support the upstream oil & gas space, albeit with some caution following ongoing challenges with key pipelines. Meanwhile, the status quo should persist across downstream players, with margin support and earnings growth likely to come from increased play in deregulated petroleum products.

Overall, we are cautiously optimistic about earnings for the rest of the year, and although we do not see it as a strong enough influence to steer market direction, we expect the top tier names with decent fundamentals to remain investors’ toast in the second half of the year.”