Despite rising inflation and the central bank rate hike spree, Nigeria equity market remains among the most competitive globally.
The Nigerian equities market currently trades at an average P/E multiple of 11.1x in the first six months of the year, which slightly higher than MSCI Frontier Market of 9.1x, and trades lower than Dow Jones’ 13.26x
In short, India and China, who are among the most expensive stocks globally, trade at P/E multiples of 24.1x and 14.1x respectively.
The stock valuation in Nigeria is also attractive when compared with other major markets in Asia and developed markets in Europe. For example, Indonesia’s benchmark index.
While the Nigerian equities market trades at a premium relative to peers, there are indications there won’t be significant sell-off based on elevated valuation.
Recently, there has been a rally in stock prices that began immediately after the swearing in of president Bola Ahmed Tinubu who announced some the market friendly reforms investors are liking and that has led many tickers to their multi-year highs.
The NGXASI has a year-to-date (YTD) return of 28.76 percent. All sectors have outperformed the index except the industrial goods index.
The NGXOil and Gas index has gained 89.52 percent so far this year; the NGXBanking index has a year to date return of 67.82 percent; NGXInsurance has gained 49.86 percent, and NGXConsumer Goods, 50.64 percent.
Analysts at Cordros Securities believe there are scope for expansion in valuation multiples this year as long as corporate earnings remain resilient.
“Investors will likely continue to seek relative safety in value stocks as they remain concerned about the market’s volatility, political and economic uncertainties, and higher interest rates,” said analysts at Cordros Securities.
Of course, most bellwether companies, especially banks, are trading below their intrinsic value, which makes their stocks attractive. And that has created entry points for beginner investors and investment opportunities.
However, the threat to corporate profit remains at elevated interest rates as a steaming inflation signals the central bank will continue to hike monetary policy rates.
It is worthy to note that stocks become less attractive and there are usually sell-offs when borrowing costs rise because profits are squeezed and valuations are depressed as investors run to safe haven assets such as government treasury that offer low returns and risk free rate of returns.
Nigeria’s 10 year bond yield was 12.88 percent on Friday July 21, according to over-the-counter interbank yield quotes for this government bond maturity.
Yields were around 3.96 percent as of October 26, 2020, a period that coincided with the coronavirus pandemic that forced the government to impose a sit at home policy that paralysed the economy.
The central bank has again increased the monetary policy rate (MPR) by 0.50 per cent to 18.50 per cent. Nigeria’s inflation rate rose to 22.79 percent in the month of June 2023, representing a 0.38 percent increase from 22.41 percent recorded in the previous month.
“On a balance factor, our prognosis is that the market will remain largely positive as we also expect investors to continue reacting to key policy changes implemented by the new administration,” said analysts at Meristem Securities.
