Review of the Economy and the Nigerian Capital Market

Transcription

1 Review of the Economy and the Nigerian Capital Market Bookshop House, 9 th Floor, 50/52 Broad Street, Lagos. Telephone Fax info@capitalassets.com.ng Website: September,

2 THE GLOBAL ECONOMY Moderate and uneven Global growth forecast at 3.1% this year and 3.6% in 2016 Disparate fortunes between the advanced and emerging market and developing economies Lower commodity prices weigh on commodity exporters The global economy is still grappling to gain momentum and the downside risks to the world economy appear more pronounced than they did just a few months ago. The International Monetary Fund (IMF) in its latest World Economic Outlook (WEO) foresees lower global growth compared to last year, with modest pickup in advanced economies and a slowing in emerging markets, primarily reflecting weakness in some large emerging economies and oil-exporting countries. This clearly indicates a divergence in the global economic environment. Advanced economies such as the United States and United Kingdom have experienced a gradual but steady growth while the emerging and developing economies are having a slowdown. The underlying drivers of growth in the advanced economies include improving financial conditions and consumer sentiments, suppressed commodity prices and favourable labour market conditions. On the flip side, the slowdown in the emerging and developing economies is mainly attributable to tight external financial conditions, mostly a direct consequence of reduced revenues from weak commodity prices, fragile global demand and other geo-political factors. Global real GDP grew at 3.4% last year and is forecast to grow at only 3.1% this year however, global growth is expected to rebound to 3.6% next year. Growth in advanced economies is projected to increase modestly to 2% this year and 2.2% next year. This year s pickup reflects primarily a strengthening of the modest recovery in the euro area and a return to positive growth in Japan, supported by declining oil prices, accommodative monetary policy, and improved financial conditions, and in some cases, currency depreciation. Growth prospects in emerging markets and developing economies however vary across countries and regions but the outlook in 2015 is generally weakening, with growth for these economies as a group projected to decline from 4.6% in 2014 to 4.0% in Growth in low-income developing economies is expected to slow to 4.8% in 2015 from 6% in 2014, in large part due to weak commodity prices and the prospect of tighter global financial conditions. Source: World Bank According to the IMF, these forecasts reflect a world economy that is at the intersection of at least three important factors. The first being China s economic transformation. That is a movement away from export and investment led growth and manufacturing in favour of a greater focus on consumption and services. The second factor is the fall in commodity prices while the third is the impending increase in United States interest rates, which can have global repercussions and add to current uncertainties

3 THE GLOBAL ECONOMY Growth in global economy is projected to pick up in This however does not reflect a general recovery but mostly a less deep recession or a partial normalization of conditions in countries that are currently in economic distress and spillovers from the stronger pickup in activity in advanced economies. Therefore, given the distribution of risks to the near-term outlook, global growth is more likely to fall short of expectations than to surprise on the upside. This projected recovery could also be stalled by important shifts such as the following: lower oil and other commodity prices, sharper-than-expected slowdown in China, disruptive asset price shifts and a further increase in financial market volatility, further appreciation of the U.S. dollar and increased geopolitical tensions

4 Nigerian Economy The Nigerian economy is facing quite a number of challenges that has resulted in a slowdown of the growth of our economy. This aligns with the observed performance of other developing economies globally. Such challenges include the decline in crude oil prices which is a downside to the economy in both the short and medium term. A direct consequence is the reduced revenue from crude sales which in effect has evolved tight financial conditions. Other headwinds are the supply gap in the foreign exchange market and rising inflation. These can be attributed to the increased pressure on the Naira and fiscal position and in some cases, significant inflation pass-through to domestic prices and geo-political factors. The deceleration in the growth of the Nigerian economy, which commenced in the third quarter of 2014, intensified and continued in the first and second quarter of According to the National Bureau of Statistics (NBS), real GDP grew by 2.35% in the second quarter of 2015, a significant decrease when compared with the 3.96% and 6.54% in the preceding quarter and corresponding period of 2014, respectively. Real GDP growth is projected by the NBS to stabilize at 2.63% in 2015, compared with the 6.22% recorded in The non-oil sector remained the main driver of growth in the second quarter of 2015, at 3.46%. The key drivers were services, trade and agriculture, contributing 1.80%, 0.95% and 0.82%, respectively. However, Oil and Natural Gas sector declined by 0.73% an improvement of 1.13% relative to the first quarter of The overall outlook for economic activity is expected to improve on account of sustained improvement in the supply of power and refined petroleum products, progress with counter-insurgency in the North East axis and efforts towards initiatives that stimulate output growth

5 Inflation Inflation has remained within the indicative benchmark target range of single digit in However, developments in the aggregate price level suggest an underlying inflationary pressure since November, The year-on-year headline inflation edged upwards in September to 9.4% from 9.3% in August which increased from 9.2% in June and July, The increase in headline inflation reflected marginal increases in both the core and food components of inflation. Core inflation rose to 9.0% in August from 8.8% in July, while food inflation increased to 10.1% from 10.05% over the same period. The uptick in inflation was mainly traceable to higher energy prices, delayed harvests and pass through from imports. Exchange Rate The average naira exchange rate remained relatively stable at the inter-bank segment, but significantly volatile in the BDC segment of the foreign exchange market. The interbank exchange rate opened at N196.95/US$ and closed at N197.00, at a daily average of N196.98/US$ between June 29 and September 18, At the bureau-de-change segment, the exchange rate opened at N224.50/US$ and closed at N The relative stability in the inter-bank market and improvement in the BDC segment were attributed to the effects of various administrative and policy measures. Reserves Gross official reserves further decreased from US$34.46 billion at end of December, 2014 to US$ billion as at 30 th September, The reserved had declined to US$ 29 billion in June this year before a marginal increase to US$ 31.6 billion recorded in August, The decline in reserves level was driven largely by increased funding of the foreign exchange market interventions to stabilize the exchange rate in the face of decline in reserve accretion. A development which has accentuated capital outflows and falling oil price has considerably reduced the accretion to external reserves. Source: IMF - 5 -

6 Nigerian Capital Market Nigerian Stock Market ended the third quarter of 2015 in the negative territory despite the expectation of an improvement in market situation and outlook which remains positive in anticipation of an improvement in economy and general market conditions. The market recorded a poor performance in the first quarter of the year with a year to date performance of -8.40% recorded for the All Share Index. However, after the successful conduct of the general elections, the market reversed to an increase in activity and a reversal in performance. Following the announcement of the presidential elections on 1 st April, 2015 coupled with the company performance announcements, the All Share Index (ASI) increased by 8.3% in a day and a best year performance of 3.09% was recorded on 2 nd April, The market has however continued on a slow decline since then with intermittent signs of recovery. The second quarter of the year recorded a performance of -3.46% while the third quarter ended further lower at -9.92%. NIGERIAN AVIATION HANDLING COMPANY PLC Though there has been a sustained improvement in performance of the market in recent weeks, the market is expected to continue to remain soft in the interim. This is because the market has been characterised by high volatility, poor performance by listed companies and low sentiments from investors who are in the dark about the economic policies of the Government. The fall in oil prices, dithering by the CBN on forex policies, corruption allegations against past governments, bankrupt states, drop in GDP and rising unemployment have all contributed to the negative outlook of the Nigerian economy, thus damaging investor sentiments further

7 Data on the indices from the Nigerian Stock Exchange Indices 3 rd Quarter 2015 Year to Date Return The NSE All-Share Index 31, NSE 30 Index 1, NSE Banking Index NSE Insurance Index NSE Consumer Goods Index NSE Oil/Gas Index NSE Lotus II 2, NSE Industrial Goods Index 22, NSE ASeM Index 1, THE NIGERIAN STOCK EXCHANGE Monthly Performance January 34, , February 29, , March 30, , April 31, , May 34, , June 34, , July 33, , August 30, , September 29, , Quarterly Performance 1st Quarter 34, , nd Quarter 31, , rd Quarter 33, , A review of the performance of the different sectors of the market benchmarked by the sectoral indices indicated that the general market performance is an indication of the poor performance of across the market sectors. All the sectoral indices recorded a negative performance for the third quarter except one. The least performing sector is the Consumer Goods sector which comprises companies in food, beverages and household items. The sector year to date performance is %. This is a reflection of the low sentiments for companies in the sector and the unimpressive financial performance reported the in the quarterly financial report submitted to the market. Companies in the Industrial Goods sector have however shown a divergent performance as the year to date return as at end of third quarter is 4.18%. This performance is reflective of the good performance of some of the companies and the resilience of the prices of the stock to the general bearish sentiment of the market. A review of the performance of the market on a quarterly basis reveals that the Market performance measured by the All Share Index recorded a loss of -6.69% in the third quarter. Further review shows that market performance recorded 5.39% gains in the second quarter and % loss in the first quarter. The 8.30% gains recorded at the close of trading on 1 st April remains a contributory factor to the positive performance recorded in the second quarter. A monthly review of market performance also reveals that the highest monthly gain of 9.33% was recorded in April. On the flip side, the highest loss of % was recorded in January in the build-up to the 2015 general elections. The bearish condition of the market was also revealed by the negative monthly performance of the market in the four months that followed the transition to a new government. Uncertainties around the economic policies of the government amidst dwindling revenue, rising inflation and the possibility of a devaluation of the naira aided the lingering bearish performance. The last month of the quarter however closed positive with 5.16% gain

8 Market Outlook The Nigerian Stock Market in the third quarter closed negative with the key market indicator, NSE ASI, far below what was expected. It was anticipated that a market recovery would be achieved following the successful transition to a new government after the general elections. The upbeat was experienced before the end of the first quarter of the tear but it was not sustained. Nonetheless, Market stakeholders expect that the last quarter of the year portends new developments and growth in terms of positive market performance and reactions. One of the key activities expected to guide the market outlook for the last quarter of 2015 and beyond for the Nigerian capital market is the re-capitalisation exercise announced by the Securities & Exchange Commission (SEC), the apex capital market regulator in Nigeria. At the end of the exercise in September, 2015, over 97% of Capital Market Operators (CMOs) have now complied with the new minimum capital requirement. Another activity is the formation of a cabinet by the President Buhari led government and disclosure of government economic policies and direction. This is expected to be concluded in the coming weeks. Some of the economic policies and plans of the government are also becoming clear particularly in the oil and gas industry, power and agriculture. The successful transition process and good will that the present Government enjoys locally and internationally portends political stability for the country. The gains against insurgency in the North Eastern region of the country also greatly signify an improvement in security. The continuous decline in the foreign reserve has been stalled despite the low accretion due to declining revenue from crude sales and there has been a relative stability in the foreign exchange market. These have been attributed to the effects of various administrative and policy measures by the CBN. These are good impetus for an improvement in the performance of the economy and can be said to be the driving force for the expected recovery of the Nigerian capital market in the last quarter of the year. Local and foreign investors who have been maintaining a tepid attitude towards the capital market are expected to make a comeback with the anticipated economic policy direction of the new government. In consideration of the foregoing, the full recovery of the market is expected to begin soon and is anchored on the unveiling of the economic blueprint by the government, a relative stability in the macroeconomy, improved security, stable consumer prices and exchange rate as well as increased external reserves. The current state of the market however creates opportunities for savvy investors who can explore the benefits of the low prices of strong and fundamental stocks with good historical performance and dividend payment

9 DISCLAIMER While due care has been taken in preparing this report, Investors are reminded that they have the primary responsibility to make their investment decisions. accepts no liability whatsoever for any loss arising from the use of this report