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One of Warren Buffet’s favorite stock market indicators is hinting that Nigeria equity valuations are compressed after a monster rally last year and a good start to 2024.
The Buffet indicator as devised by American billionaire investor popularly referred to as the oracle of omaha is sitting at significantly undervalued levels.
The indicator takes the total market capitalisation and divides it by gross domestic product (GDP).
Crunching some numbers, the Buffet indicator for Nigeria stands at about 11.50 percent, according to MoneyCentral calculations.
The stock market capitalization-to-GDP ratio is a ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average.
If the valuation ratio falls between 50 percent and 75 percent, the market can be said to be modestly undervalued. Also, the market may be fairly valued if the ratio falls between 75 percent and 90 percent, and modestly overvalued if it falls within the range of 90 and 115 percent.
Last year, there was a monster rally in the equity market that was the best globally as the NGXASI index had gained 45.12 percent.
It appears the growth momentum is being maintained this year as the index has a year to date (Y-T-D) of 11.06 percent as of January 12.
The NGX ASI is currently at 45,442, 49 points, with a return of 11.02 percent, signaling investors still have confidence in the reforms of president Bola Ahmed Tinubu.
Analysts say the lack of confidence in the ability of the government to implement some of its policies are responsible for the contraction in valuation.
But analysts at Cordros Securities say there appears to be room for potential expansion in valuation multiples in 2024FY, contingent upon the sustained resilience in corporate earnings.
“We believe companies that declared no dividends in the current year will likely return to rewarding shareholders with dividends in 2024FY,” said analysts at Cordros Securities.
It appears banks might jerk up payout ratio since they posted record profits on the back of foreign exchange revaluation gains and a higher yield environment.
Analysts at Meristem Securities have maintained the perspective that the Nigerian equity market has the potential for further advancement.
Being comparatively undervalued (lower P/E ratio) in relation to its peers, underscores the attractiveness and affordability of the local bourse looking to take strategic position.
While the new reforms have ballooned inflation and stoked corporate losses for some firms, there is light at the end of the tunnel as the World Bank is sanguine about the country’s economic outlook.
The World Bank has projected Nigeria’s economy to grow at 3.3 per cent this year, about 0.4 percentage points higher than the 2.9 per cent it is expected to have closed last year.
There are concerns that a high interest rate environment which bloats the debt of companies combined with rising cost of production could depress share prices and suppress valuation.
Nigeria 10 year bond yield was 13.47 percent on Friday January12, according to over-the-counter interbank yield quotes for this government bond maturity. Historically, the Nigeria 10-Year Government Bond Yield reached an all-time high of 17.31 in February of 2015.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased its benchmark interest rate (MPR) for the third time this year by 50 basis points to 18.5 percent.
“I think the market may take a breather this year, notwithstanding expected improvement in FPI inflows. Primary market may see more activity but valuations may take a breather,” said Abiola Rasa, former Chief Economist at United Bank for Africa (UBA) Plc.
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