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Tuesday, September 26, 2023

Projected Sovereign Debt Issuance of N540bn Underpins Pessimistic Outlook for Equities

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The projected N540 billion sovereign debt issue in the third quarter has sharpened fears that the bearish trend, which dragged the Nigerian stock market to the ground, is intensifying.

The worries are that more debt issuances will accelerate the wave of selling, which sends bond yields rising, as investors have reduced exposure for equity in search of yield at the short end of the curve amid the prevailing tightened financial system liquidity.

The Nigerian Equities Market continued its downtrend into the second quarter (Q2 2021), as the NSE ASI declined further, down 2.91 percent to 37,907.28pts.   As of the end of June 2021, the NGSE ASI index was down 5.87 percent.

The bearish trend in the second half (H1) was driven largely by losses in the Industrials -8.02 percent, and Banks -6.76 percent. On the flipside, the Oil & Gas, Insurance, and the Consumer goods sectors were up 38.41 percent, 7.57 percent and 4.80 percent respectively in the period, according to analysts at CSL Stockbrokers Limited.

Investors are grappling with multiple concerns, including doubt about a strong economic growth, equity valuation, deteriorating foreign direct investment, inflationary pressures, currency devaluation, and the effects of higher interest rates on businesses.

Investors are asking themselves what the impact of the aforementioned issue will have on corporate earnings since they like stocks that deliver higher returns that magnifies their earnings.

However, corporate earnings have been stellar as evidenced by second quarter results of the largest companies, which validates a gradual economic recovery that was bolstered by a rebound in crude oil price as the relaxation of lockdown measures by the government accelerated business activities.

The Nigerian economy expanded by o.5 percent in the first quarter (Q1) 2021 from 0.1 percent in the fourth quarter (Q4) 2020, according to recent data by the National Bureau of Statistics (NBS).

Nigeria’s unemployment rate rose to 33.3 percent in Q4 2020 (Q3 2020: 27.1 percent), the highest since at least 1980.

Inflation moderated to 17.75 percent in June, the third consecutive month of decline as the farmers and herdsmen bedlam coupled with kidnapping continues to threaten food security.

The thirty most capitalized and liquid firms otherwise known as “Nigerian Stock Exchange (NSE) 30” however saw a combined net income spike by 35.13 percent to N695 billion in March 2021 from N514.86 billion as at March 2020, according to data gathered by MoneyCentral.

The dramatic turn of events in the market is amazing because as of the end of 2020, the Nigerian equity market returned 50 percent, which made it the world’s best performing.

For the bond market, the dovish tone of the central bank that started in 2019 had depressed fixed income investment, and sent as low as between 2 and 4 percent.

But bond yields have been on an upward trajectory since 2021 as locals demand higher yields and need to attract foreign interest in Nigerian securities amid dollar shortage.

The Nigeria 10 years government bond has a 12.466 percent yield as at July 2021, according to data from FMDQ.

The Nigeria 10 years Government bond reached a maximum yield of 15.856 percent as at December 4, 2018.

Analysts expect investors to buy into stocks with strong half earnings and with high dividend yield.

Zenith Bank, the largest lender by profit, has a dividend yield of 12.35 percent, the highest in Nigeria. Guaranty Trust Bank, the largest lender by market value, has a yield of 10.10 percent. Access Bank, (8.89 percent)United Bank for Africa, (6.84 percent), and Dangote Cement, (6.94 percent).

“In the near term, we expect equities to continue on the downtrend as yields tick higher,” analysts at United Capital Research.

“However, the stock market may gain some respite in the form of strong corporate earnings from large caps and tier-one banks, and some support from ample market liquidity and buy interest from bargain and dividend yield-seeking investors,” summed analysts at United Capital.

“We see a likelihood of a rate hike of 50bps in H2. We project the fiscal deficit of N6.5trn (5% of GDP) in 2021, on the back of increasing recurrent expenditure and elevated debt servicing.”

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