Operators hopeful for an attractive capital market in 2020

The Nigeria capital market is one of the sectors expected to thrive in the year 2020 and provide a more attractive platform for investors. In this report AMAKA IFEAKANDU writes on the factors that would help reshape, bring sustainable growth in the market  and contribute to the development of the economy.

Harsh operating environment

The nation’s capital market is seen as one of the sectors that would thrive in the 2020, despite the harsh operating environment experiencing in the financial system and economy at large.

Some financial  analysts have expressed optimism  that the current  low interest rate in money market instruments and the unprecedented early passage of the 2020 budget by the senate in December 2019, to return the economy to a January to December budget cycle, are positive developments and  will boost activities in the capital market.

They also said that lower yield environment, triggered by the CBN’s recent mix of heterodox policy actions, will not only ease the cost of rolling over government borrowings, but also stimulate domestic private sector investment, adding that before now the management of the NSE has committed resources to setting up a structure to enable the exchange play a bigger role in funding the growth of various sectors of the economy.

Modest recovery

They stated that the capital market will record modest recovery on the basis of more stable political backdrop, increased capital expenditure, currency stability and slight stronger economic growth.

But on the contrary, some operators hold different opinion saying that the underlying theme of the outlook report for this year was change, insisting that changes in the key indicators such as oil prices, the status of the US-China trade war, domestic fiscal and monetary policy environment will likely affect investment landscape in Nigeria in 2020.

Meanwhile, operators had earlier said that the success of the equities market was driven by investors taking advantage of relatively undervalued stocks listed on the bourse.

Specifically, they said that equity market which started on a positive note this year was an indication that fund managers are trying to reposition their portfolios ahead of the 2019 earnings reporting season.

Market capitalisation

Available data showed that  between December 31, 2019 and January 10, 2020, the NSE All Share index appreciated by 2,573.30 basis points or 9.586 per cent to 29415.37 points from 26842.07 it closed for the year. The market capitalisation also grew by N2.216 trillion or 17.101 per cent to N15. 174 trillion from N12.958 trillion it opened for the year, following  the listing of 33.38 billion  shares of BUA Cement Plc valued at N1.18 trillion.

 But other capital market operators  believed that this year is a different playing field for capital market players. 

They said that while the fixed income market will be a corporate/ private issuer market due to the buoyant level liquidity and the low yield environment, the yields on FGN Treasury bills  projected to stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in the first half of 2020.  

Interest rate in riskier assets

They said that interest rate in riskier assets, mostly corporate papers will increase while the rate on OMO bills, solely for foreign Portfolio investment (FPIs) and Banks are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in the first quarter of 20 while preserving the stock of reserves above the $30.0 billion  threshold. 

“Overall, analysts expected that the sovereign yield curve to remain normal in first half of 2020, adding that  this may reverse to a hump-shaped curve from third quarter 2020.”

For equity market, they said the continued auction of high yield OMO bills to FPIs may keep foreign interest in local equity market tepid amid fears of a naira devaluation and confidence deficit in the economy while FPIs are likely to continue their flight to safety by swapping/selling equities for low-risk OMO bills. 

Monetary policy as the biggest factor

Experts with United Capital  Reserach group predicted that  outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch. From all indications, they said that the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity. 

This according to them  will not be enough to trigger a major rally in the absence of the demand from FPIs. They were optimistic that equities market will return at +5.3 per cent in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity.

Commenting on the expectations  in capital market in 2020,  Chief Research Officer, InvestData Ltd., Ambrose Omordion, said the positive trend in the market since beginning of this year showed  that  local institutional investors and funds managers have  taken advantage of the two consecutive years of decline to reposition their portfolios for the new year expectations, as the  economic recovery is likely to continue,   dividend yields of quoted companies to remain relatively higher than the prevailing money market  rates and fixed income  instruments as flow of funds continue in the financial market. 

This rally according to him has been sustained as the remaining foreign investors are not exiting yet ahead of 2019 full year earnings reporting season and expected positive marcoeconomic data.

Low interest rate regime

He said the listing of BUA Cement Plc after conclusion of merger with Cement Company of Northern Nigeria and Odu Cement helped to lift the NSE Market capitalisation.

On the prospect of capital market in 2020, he said low interest rate regime, increased credit to the real sector and early assent of the 2020 budget would impact positively on the market.

“The market in 2020 looks promising as factors that will shape the economy and stock market are on the increase, in spite of the continuous downgrade by rating agencies,” Omordion said.

He stated that early implementation of capital expenditure would have multiplier effect on the economy.

According to him, regulatory initiatives and policies such as the Central Bank of Nigeria (CBN) Treasury Bills (TBs) and Open Market Operation (OMO) restrictions will encourage local and institutional investors’ sentiment to the equity market.

New free float rule

He noted that the exchange new free float rule expected to commence on Jan. 2, 2020 would improve market liquidity and transparency, thereby impacting positively on the market.

On sectors to watch out in 2020, Omordion said that financial, consumer goods, building materials, telecomms/ICT would be the most sought by investors.“The financial sector is more marketable, consistent in dividend payout and if the economy finds its feet in 2020, the banks will benefit more,” Omordion said.

He noted that low price attraction of consumer goods stocks due to huge losses suffered in 2019 would make the sector attractive, adding that low interest rate on consumption would boost industry earnings, while mobile licence would boost telecomms sector’s profitability.

 Managing Director, APT Securities and Funds Ltd., Garba Kurfi, said 2020 would be a better year for the Nigerian stock market, insisting that 2018 and 2019 recorded loss in two digits of 18 per cent and 16 per cent and a decline of 34 per cent.

“The crash of interest rate in the money market instrument from 15 per cent to about seven per cent or less makes money market returns negative compared with inflation of about 12 per cent,” he said.On his part.

 Development projects

A stockbroker and Managing Director of Sofunix Investment and Communications Limited, Sola Oni, said aside expectations of faithful implementation of 2020 budget, which was approved on record time, government at all levels must take advantage of the market to mobilize fund for development projects.

“However, we expect the market to be driven by a mix of factors. Effects of negative real return on fixed income securities following the new policy on OMO will continue to enhance demand for equities and attract more investors into the market,” he said.

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