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Wednesday, March 29, 2023

Low Yields no Succor for Equities as Multiple Expansion Fails to Materialize

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Despite having rallied 30.5 percent this year, the Nigerian Stock Exchange (NSE) All Share Index is still 28 percent below its January 2018 peak of 45,000 points, and hasn’t matched bond market returns in 2020 (See chart).

Lagging Behind

Nigerian stocks trade at a trailing price to earnings (P/E) multiple of 13.24, trailing valuations in South Africa which trades at a 26.3 multiple, Tunisia 21.4, and Morocco 29.6.

On a one-year timeline, stocks have returned below the 52.49 percent gain generated by Nigerian government debt, as measured by the S&P FMDQ Nigerian Sovereign Bond Index.

With 1-Year Government paper yielding a ridiculous 0.51 percent, and the longer dated benchmark 10-year bond yields at 5.09 percent, stocks should probably be trading much higher.

However, stocks are not really expensive at a price-to-earnings multiple of 13 times this year’s expected earnings, but that multiple expansion has failed to materialize despite the huge drop in bond yields, which make future earnings cheaper today.

When one drills down into the various sectors of the markets the picture is even more negative. Companies that are more closely tied to the broad economy are worse off, with the banking, insurance, Agriculture, and oil and gas index, all trading below the average broad market P/E multiple.

Only the Industrial Goods Index with a price-to-earnings multiple of 17.8 times is trading above the market average due to solid performances from Dangote Cement, BUA Cement and Lafarge which have all seen a resilience to earnings this year despite the coronavirus lockdowns.

Stocks extended their bearish performance into the third consecutive session yesterday as the benchmark All Share Index (ASI) shed 4 basis points to settle at 35,029.82 points.

“We think investors will continue to maintain a cautious approach to investing in the absence of any major positive catalyst,” United Capital analysts said.

In corporate Finance, the so called “Fed model” postulates that low interest rates justify – and “allow” – high earnings multiples.

Investors are however right to be cautious as companies operating in Nigeria’s sluggish economy are struggling to grow earnings (the E in the P/E multiple equation).

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