Positive Outlook for Nigeria’s Economy in H2’17 as Investor Momentum Gathers

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    Following the drawbacks of 2016, the equity market is showing signs of a turnaround. With recent events and policies, there is rising optimism that Nigeria has put its worst performance behind it. In Q2’17, the equity market saw a significant improvement in trading activity, with the average daily value traded increasing by 93.8%, from N2.1 billion in Q1’17 to N4.1 billion in Q2’17.

    Market activity was driven primarily by domestic activity, with total domestic trade value berthing at N142.9 billion in Q2’17 compared to foreign trades within the same period (N117.6 billion). We expect the equity market return in H2’17 to be primarily shaped by salient policy decisions taken in H1’17 such as the efficiency and sustained liquidity in the ‘Investor/Exporter’ window in the FX market as well as the implementation of the 2017 national budget.

    The economy has started reaping the benefits of these policies as already seen by the year-to-date performance of the equity market (H1’17: +23.80%). Whilst we foresee a somewhat positive outlook in the Nigerian equity market in H2’17, we cannot overemphasize the fact that this outlook is hinged on the following catalysts and how they play out in the second half of the year;

    Domestic investors maintaining the momentum in H2– Following from Q2 performance, we expect domestic participation- both retail and institutional to ramp up in H2. The domestic market has without a doubt had its fair share of hills and troughs in 2017, but however, seeing as domestic investors outplayed their foreign counterparts in the equity market, holding 54% of total equity market share in H1, we expect this trend to continue in H2.

    We anticipate that the market will be largely driven by domestic institutional investors who constituted 70% of total domestic investments in H1 and with total domestic trades increasing by 84% YoY. Institutional investors recorded volumes of about N86.2 billion in Q2 as opposed to the volumes by domestic retail investors within the same period (N56.7 billion).

    We attribute the increase in domestic institutional trades to four factors – significant increase in local proprietary positions by dealers following a depressed 2016 and in view of cheap valuations, new pension policies especially the allowance given to pension fund managers to invest in bank holding companies and increased allocation to equities by local asset managers.

    In H2, we expect the implementation framework for the new multi-fund structure introduced by PENCOM to be released, which should be a major catalyst for the equity market. Hence, we expect increased participation by pension fund managers in equities and believe the positive sentiment in the equity market will be sustained.

    CBN’s NAFEX window likely to attract more FPIs in H2’17

    So far, this window has allowed for a more market determined exchange rate of the Naira for investors and exporters which has had a direct impact on portfolio inflows. A number of funds have adjusted their pricing template to reflect the NAFEX rate. At this new window, over $3.8 billion has been traded from inception till date.

    With the seemingly easier accessibility to FX by foreign institutional investors at the NAFEX window and the sustainability of FX liquidity at the window since its commencement, we believe many more frontier-focused equity managers will be more inclined to increase their allocation to Nigerian equities in H2’17.

    … But MSCI postponed decision remains a risk – A key risk to our expectation of increased foreign participation in Nigerian equities in H2 remains the MSCI indecisiveness on Nigeria’s state in the frontier market index and the fact that the decision on a potential reclassification has been shifted to November 2017.

    On the 15th of June 2016, Morgan Stanley Capital International (MSCI) announced its proposition to remove Nigeria from its MSCI FMI and reclassify the country’s index as a standalone index due to capital mobility issues.

    The decision, which was expected to be announced on the 20th of June 2017 has been postponed to November, creating some apprehension amongst foreign investors.

    Possible Decline in oil prices is also key risk to H2 equities outlook–

    Oil prices in Q1’17 remained stable at average of $55/barrel as the OPEC crude oil production cuts remained effective. However, these prices dipped to around $50/barrel, and fell further to a year low of $44/barrel in June owing to expectation of an increase in Shale Oil production.

    The expectation of a rising shale production has created some uncertainty in the effectiveness of the OPEC cuts on the global fronts.

    As a country still largely reliant on oil exports as its major source of FX, this may have some negative consequences on our current FX situation which has been the largest deterrent to FPIs aiming to invest in the Nigerian market.

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