…FSDH recommends value-investing
Despite the sustained and heavy bear run on the equity market in the Nigerian Stock Exchange, NSE, investment analysts believe recovery may happen in the first quarter of the year.
However, they also hinted on several factors that could mute the level of recovery and at the end of the year only a moderate recovery would be achieve.
The equity market depreciated by 17.81% in 2018, after an appreciation of 42.30% recorded in 2017. In the first trading week up till yesterday, the market had continued in downward trend hitting a Year-to-Date, YtD, loss of -3.3 percent.
Analysts at FSDH Merchant Bank Limited said though they expect a modest recovery a number of factors may limit the growth of the equity market in 2019.
They stated: “We believe it will record a modest recovery. The election activities that will dominate the first quarter of the year may deter investors throughout Q1 2019.”
According to them informed investors usually make money from the equity market when other investors are cautious, adding that this would lead to some strategic positioning in the equity market in the first quarter of 2019, Q1’19, ahead of a recovery in Q2’19.
Developments within the global crude oil market may determine the direction of the equity market.
FSDH Research observes that the price of crude oil and the Nigerian equity market tend to move in a similar direction.
The global consensus forecast on the average crude oil price in 2019 is between US$60/b – US$70/b. The current price at US$58/b (Brent Crude) is below this forecast for the year 2019. The trade war between the US and China, if not averted, may also have negative impacts on the equity market. Most analysts say the widely anticipated increase in interest rates in major central banks around the world may reduce global liquidity and flow of liquidity into the equity market. Therefore, it may limit the growth of the market.
Apart from uncertainties surrounding the election in Nigeria, the exchange and interest rates are other factors that investors should monitor closely.
On this, FSDH Research says, “Although we expect a depreciation in the value of the Naira against the US Dollar by about 6.67% toward N390/US$ in 2019, a significant depreciation may have a negative impact on the equity market.”
In its research report entitled ‘Key Events in 2019 – Implication for Investment and Business’, FSDH Research expects interest rate and yields on fixed income securities to increase in 2019.
They stated: “An increase in the yields on fixed income securities, considered by many investors to be low-risk investments, may depress the equity market as investors realign their portfolios in favour of such fixed income securities.”
The analysts also believe, there may be a few activities in the primary market segment of the equity market in 2019 as investors lean towards fixed income securities to secure high yields.
The analysts are also looking at the performance of companies listed on the NSE, which will either woo investors to the market or discourage them. FSDH Research’s analysis shows that the earnings performance of the quoted companies may show improvements in 2019 compared with 2018 if appropriate policies are implemented to address the risk factors in the economy.
They stated: “While we note that Nigeria has recorded some improvements in the transportation and power sectors, more policies are required to unleash the full potential of the economy. Nigeria needs specific and workable policies in the real estate sector, judicial system and at the sea ports in order to attract and grow investments in the country.”
Investment recommendations FSDH Research recommends value-investing strategies for stock investment in 2019.
They stated: “Investors should select companies in good business with sound fundamentals, whose share prices are trading below their fair values. They should buy and hold stocks and ignore market volatility associated with overreaction in the market.
“We believe the following sector of the NSE should record fairly strong growth in 2019: Consumer Goods, Industrial Goods, Financial Services (Banking, while we expect strategic acquisition in the insurance sub-sector) and Oil and Gas. “The following are our top stocks to watch: Flour Mills of Nigeria, Nestlé Nigeria, Dangote Sugar, Zenith Bank, GT Bank, FBN Holdings, Transcorp, Dangote Cement, Seplat and Total Nigeria.” Vanguard