Investors face tough second half on bleak Nigeria indices

By Chuks Oluigbo

• Analysts list diversification‭, ‬portfolio‭ ‬rotation among key strategies‭ ‬

As the global economy, still smarting from Covid-19-induced economic downturn, confronts new challenges, including supply chain disruptions arising from the Russia-Ukraine conflict, drop in production and trade growth, higher energy and food prices, and rising inflation, uncertainties cloud the investment climate.

In Nigeria, Africa’s largest economy, these economic uncertainties have been exacerbated by low crude oil production, persistent decline in capital importation, accelerating inflation, worsening debt positions and rising insecurity.

The uncertainties will grow and investors will face tougher choices going into the second half of 2022, according to analysts at Cowry Asset Management Limited, an investment banking firm.

In a recent presentation titled, “2022 Half Year Review: The Local & Global Macro-Economy”, Cowry Asset Management analysts said in H2 2022, FX rates pressure will persist amid less impressive net inflows into foreign reserves, low crude oil production will hurt revenue expectation, inflation risk will remain elevated on the back of higher energy prices and rising global food insecurity, while structural constraints will sustain pressure on external position.

For Nigeria’s equities market, the analysts said high and unstable inflation rates and depreciating FX exchange rates will hinder corporate performance; interest rates will remain depressed, thereby encouraging equity investments; strained purchasing power and the rising cost of doing business will depress both the topline and the bottom-line of corporates; and political concerns will drive more portfolio and patient capital investors to the sidelines.

Amid these uncertainties, however, the analysts listed diversification, portfolio rotation, cautious optimism, market timing, and staying liquid as key investment strategy themes that will help investors stay afloat in the second half of 2022.

“We highlight that diversification remains a key theme of our 2022 strategy. In a time of economic recovery, we expect investors to diversify across and within assets in order to minimise risks and improve returns,” said Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited, who made the presentation.

On portfolio rotation, Chukwu said 2022 is expected to be a year of policy normalisation across the world and so investors should rotate from long-term assets to short/mid-dated assets as the former is more vulnerable in such a period.

He advised investors to be cautiously optimistic, saying, “In the face of heightened concerns about economic recovery, we do not want to be caught off-guard. We expect investors to be guided by both fundamental and market sentiment.”

On the need to stay liquid, he said, “Cash is King. Cash is the 5th strategy for 2022, as the market could prevent pockets of opportunities in the year ahead. Liquidity is key overall in 2022. With sufficient liquidity, investors can take advantage of market drawdown/mispriced assets.”

The report, giving an overview of the Nigerian economy in the first half of 2022, observed that the country’s GDP recorded its sixth consecutive quarter of positive growth in the first quarter of 2022 when it grew by 3.11 percent (year-on-year) in real terms. Though a decline of 0.88 percent when compared to the preceding quarter (3.98 percent), it represented an uptick of 2.60 percent relative to the growth rate recorded in Q1 2021 which stood at 0.51 percent.

The oil sector recorded a real growth rate of minus 26.04 percent y-o-y in the first quarter of 2022, marking the eighth consecutive contraction. On the contrary, the non-oil sector thrived, recording a real growth rate of 6.08 percent y-o-y in the review period, up by 5.28 percent and 1.34 percent from 0.79 percent and 4.44 percent recorded in Q1 2021 and Q4 2021, respectively.

However, decreasing oil revenue poses a threat of another recession after Nigeria experienced similar scenarios in 2016 and 2020, the report said, citing the continual slowing down of GDP from 5.01 percent in Q2 of 2021 to 4.03 percent in Q3, 3.98 percent in Q4 of 2021, and 3.11 percent in Q1 2022.

Equally, Nigeria’s inflation rate accelerated to an 11-month high of 17.71 percent in May 2022, driven by high prices and supply-side constraints. The rising inflation further eroded the purchasing power of Nigerians leading to deterioration in standard of living, decline in aggregate demand with attendant slowdown in productivity and employment, as well as inventory pileup due to slow demand.

Giving a sector-by-sector outlook for the economy in the second half of 2022, Chukwu said though banking sector equities lagged other sectors in the half-year performance, with the NGX Banking Index dropping from 406.07 index points to 397.79 index points and depreciating by -2.04 percent, the hike in MPR to 13 percent by the MPC is encouraging banks to reprice their risk assets, although they are resisting any increase in deposit rates.

The rise in inflation forced the CBN’s Monetary Policy Committee (MPC) to raise MPR to 13 percent at its last meeting in May 2022 while leaving all other key policy parameters unchanged.

“We expect an increase in net interest income in Q2 which is expected to impact on the banking sector positively in the second half of 2022; increased political spending ahead of the 2023 general election,” he said.

In telecoms, which added 2.1 million new telephone lines to the networks in the first half of the year, leading to a significant expansion of its revenue base, Chukwu said the approval of MTN and Airtel payment service banking licences may cause both stocks to keep rising for the rest of the year. Equally, through proposed tariffs raising of customers, the telcos will be able to offload some of the weight of their increasing operating costs.

The outlook for the industrial sector, which gained 4.095 percent as at close of business on 30 June, 2022, is positive, Chukwu said. The sector expanded by 5.89 percent (YoY) in real terms in Q1 in 2022, and contributed 10.2 percent to Nigeria’s GDP, in Q1 2022.

“There is a perceived growing need and interest in infrastructure development in Nigeria, where all perspectives of construction, ranging from real estate investment, making real estate assets a store of value (hotels, homes, recreational centres, etc.).

“As the election period approaches, there is a rush to complete road and infrastructure projects as campaign strategy which will increase the demand for construction materials,” he said.

The oil and gas sector recorded a 58 percent increase in price in the first half of the year, due perhaps to the rise in global oil prices and the upbeat outlook for the whole energy industry following Russia’s invasion of Ukraine.

Cowry Asset analysts expect the upward trend to continue as the Ukraine/Russia crisis shows no signs of abating.

“With Russia threatening to halt their oil exports, there are fears of an even tighter constriction on an already limited global oil supply,” Chukwu said.

For the Consumer Goods sector, which index has the third highest growth among indices on the NGX, recording a 5.8 percent increase in price since the turn of the year, Cowry Asset Management analysts said demand for basic consumer goods will grow as liquidity gets in the hands of political hirelings.

“For the Fixed Income market, yields will largely be determined by supply of government securities vis-a-vis investors’ demand levels/system liquidity,” Chukwu said.

“Plus, due to rise in Emerging Market risk premium by over 2 percent, elevated overall budget deficit in 2022, we expect a marginal uptick in yield levels and persistent bearish sentiments for the third and running into the fourth quarter,” he said.

On the forex market outlook, with the dollar supply at record lows due to Central Bank’s constrained capacity, he said the official exchange rate is expected to trade between the N415-N440 band in 2022, and traders are now predicting a N650/$1 parallel market exchange rate in H2.

The analysts also gave alternative investment outlook strategies for 2022. According to the analysts, risk consciousness should take centre stage, inflation hedge considerations should guide return expectation, and shorter investment gestation should prevail for liquidity reasons.

“A medium-to-long-term investment in alternative assets heightens the risk of a major loss. It is therefore strategic to carefully choose investments with a shorter gestation,” Chukwu said.