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Friday, August 12, 2022

Nigeria Impervious to a U.S Recession

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Nigeria and emerging market countries are impervious to a U.S recession that many analysts see as inevitable given red-hot inflation, rising interest rate, sell-off in stocks, and Russian/Ukraine war.

It is important to note that money managers including JPMorgan Chase & Co. and Deutsche say beyond the short-term turbulence, developing nations will be cushioned by cheap valuations, higher yields, faster growth and above all, a resurgent China.

Deteriorating risk assets have forced investors to pack their money in treasuries and other haven assets as central bankers in the U.S. and Europe have embarked on aggressive monetary policy to curb rising inflation.

 “We may be close to peak pessimism,” said Oliver Harvey, who heads currency research for central and eastern Europe, the Middle East, Africa and Latin America at Deutsche Bank,”

“There are reasons to think emerging-market performance could hold up better than in past recessions, including very low foreign ownership of local assets, a relatively high starting point for interest rates and cheap valuations,” said Harvey.

It is imperative to note that the Nigerian equity market is the second best performer in Africa as the NGX ASI that has gained 21.24 percent so far, underpinned by good corporate earnings, dividend declaration, and depressed fixed income.

Of course, another reason for equity resilience is rooted in the exodus of foreign investors from the market due to foreign exchange liquidity issues.

Analysts at Cordros Securities in a recent note to clients say they do not think the uncertainties which typically characterized pre-election years and trigger apathy for stocks will lead to a significant downturn in the market in H2-2022.

“It is imperative to note that the current market’s structure is quite different from those years,” said analysts at Cordros Securities.

“To provide context, we highlight that the average share of foreign investors in the equities market stood at 58 percent and 54 percent in 2014 and 2018, respectively, which pales in comparison to the average share 22.70 percent in 2021 and 18.80 percent (January to April 2022). Overall, we think the market will deliver the third consecutive year of positive returns, which also halts the negative trends in the last two pre-election years,’’ said the analysts.

Valuations have been attractive, which is a good entry point for investors. Analysts expect stellar performance from companies and steady dividend payment while a peaceful election will add impetus to the stock market in a normalized yield environment.

The combined net income of the largest and most liquid firms known as NSE 30 stood at N883.13 billion, which is 20.18 percent higher than 2021’s N734.13 billion, according to data gathered by MoneyCentral.

It is worth noting that a gradual improvement in yield environment, rebound in the price of crude oil, reopening of the economy as evidenced in the successful rollout of vaccines, and hike in the price of key products by firms to ward off the effect of rising input cost are major drivers of corporate profit growth.

The Q1-2022 GDP figures showed that the Nigerian economy expanded by 3.1 percent y/y in real terms in what was broadly a positive surprise as the growth print topped consensus expectation even amid unprecedented developments in the global economic environment including rising inflationary pressure, higher importation costs (due disruption in the global supply chain), and geo-political uncertainties.

 The manufacturing sector sustained the positive trend seen in the past four consecutive quarters, rising by 5.89% in Q1 2022 from 2.28% y/y in Q4 2021 and 3.40% y/y in Q1 2021, analysis of the Q1 2022 GDP report showed.

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