Uncertainties Extend Market Downturn

Transcription

1 February 21, 2014 Uncertainties Extend Market Downturn The Path Ahead 1

2 Uncertainties Extend Market Downturn Path Ahead Value in the mire The Nigerian Bourse has witnessed several bumps so far this year; the culprits include monetary policy pronouncements especially on CRR, political quagmire and the recent suspension of the CBN governor which have stired up investor s panic. Despite the lingering situations, the Nigerian equities look very attractive compared to what was obtainable in The current market P/E of 13.53x compared to 2013 year end P/E of 14.5x, and the sectoral P/E compared with 2013 yearend P/E show that the market looks ripe for investors to savour. Market and Sectoral P/E AGRICULTURE CONSTRUCTION/REAL ESTATE FEB DEC.2013 Market P/E FINANCIAL SERVICES INDUSTRIAL GOODS SERVICES Impressive Earnings results to continue to drive investor s reaction A number of listed stocks such as NB, GUINNESS, PZ, and FLOURMILLS released their results early in the week and they were quite favourably thus trigger further positive reactions from investors. We expect more impressive earnings results, which we believe will drive favourable reactions from investors and therefore slightly temper the uncertainties in the market. The recent bearish mood in the market is also expected to make some of these tickers attractive. Although we expect the share price performance of banking stocks to remain depressed by the monetary policy tightening and recent events relating to suspension of CBN governor, current prices make the expected dividend yields on these banks ever more attractive at an average of 8.6%. We believe that investors will reward banking stocks with impressive performance with positive sentiments. 2

3 Trading has been largely based on panic and fear resulting from the series of downbeat assessment and not-too-pleasant news flow, both from emerging markets and the domestic space, filtering into the market. Little recourse has been made to the fundamentals of the stocks. As ongoing news begins to fade out and anticipated corporate actions are priced in, we expect to see a reversal of the current trend. Market Index YtD Returns Japan NKY Index -8.8% NSEASI -7.3% China HSI Index -3.2% US Dow Jones -2.7% India SENSEX INDEX -2.1% S&P % STOXX Global 1800 Index 0.4% Euro Stoxx % FTSE % Source: Bloomberg Mixed Reactions across Global Markets There have been mixed reactions across global markets. According to Bloomberg estimates, more than USD1.8trillion has been added to the value of equities worldwide this month amid speculation the global economy is strong enough to withstand stimulus cuts. The S&P 500 Index has returned -0.5% YtD while the effect of the goings-on has been graver on emerging markets and some other developed markets, with most of the equities markets in the negative realm. The Indian, Chinese and Japanese markets have returned -2.1%, -3.2% and -8.8% respectively. Rising Interest Rate across the globe, should we take a cue? The expectations of rising interest rate in developed countries after years of ultraloose monetary policy has sparked concerns of a possible stifling of growth in emerging markets. Forecast of rates hikes in US, UK and Sweden this year have risen in recent months as their economies recovers. Federal Reserve officials started to debate rising interest rates in January, with some arguing they might need to hike rate sooner than expected. A few participants of the FOMC raised the possibility that it might be appropriate to increase the federal funds rate relatively soon. With the unemployment rate approaching 6.5%, it would soon be appropriate for the committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate. 3

4 Nigeria and other Emerging Markets The normalization of interest rate in advanced economies has seen emerging markets such as Brazil, Turkey, Argentina and South Africa raise interest rate to stem capital flight from their economies and keep inflation in check. Do we expect the same approach in our domestic monetary environment? Nigeria Deviating from Emerging Market Trend 1.5 Emerging Frontier South Africa singapore Nigeria Brazil s&p Nigeria s recent price trajectory is deviating from the emerging market trend Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: Bloomberg, Meristem Research While Nigeria remain among emerging markets, recent activities in the nation s capital market seem not to trend in line with peers; while the emerging market performance as measured by MSCI index returned 0.70% WtD and 1.5% MtD, the Nigerian bourse however has lost 1.22% and 5.61% WtD and MtD respectively. Furthermore, while other emerging market recently reviewed their benchmark policy upward (Brazil 50bps, South Africa 50bps and India 25bps) on the back of QE tapering, Nigeria apex bank stick to its guns and maintain the MPR at 12%. Monetary policy tightening stance is expected to continue The Monetary Policy Committee increased MPR by 275bps to 12% in October 2011, as a result of price and exchange rate instability coupled with global occurrences at that time which fuelled continuous capital outflow from emerging and frontier markets given the sovereign debt crisis in the euro zone. Ever since, the outcome of the MPC meeting has always resulted in retaining the MPR at 12% as a result of CBN s contractionary monetary policy. 4

5 In the last MPC meeting, in an attempt to support the naira, it was decided to leave the benchmark interest rate unchanged at 12% for the fourteenth straight meeting and also increase the Cash Reserve Ratio on public sector deposits to 75% from 50%, while CRR on private sector deposits was left at 12%. Some of the factors that led to the increase of the MPR to 12% in 2011 are resurfacing; such factors as exchange rate instability increase in core inflation and falling FPI and FDI inflows. The recent news of the suspension of the CBN governor has also put more pressure on the naira as there was high volatility in the exchange rate. Therefore we expect the MPC to continue its monetary policy tightening trend. The recent volatility in emerging market (EMEs) has seen sharp reactions from apex banks in these economies, with increase in key rates in Ghana, turkey, india etc. the decision of the FED to go on with its planned tapering further amplifies this volatility. We analyse the possibility of the current management of CBN to raise the MPR the face of the recent events. Data suggest that policy rate in Nigeria at 12% remains one of the highest among to BRICS, MINTS and developed economies. Going by the fact that this interest rate differential remains favourable to Nigeria, we do not see the MPC raising MPR further in the upcoming meeting going forward. Besides, we think the current management of the CBN management led by Dr. Sarah Alade will maintain the current tight monetary policy stance. Interest rate Monitor: Across borders Interbank Offer Rates 1-M 3-M 6-M 12-M China: CHIBOR EGYPT: EGDIR Europe: EURIBOR Japan: TIBOR Nigeria: NIBOR Saudi Arabia: SAIBOR South Africa: JIBAR UK: LIBOR US: BBA LIBOR

6 Central Bank Benchmark rates BRICS Rates Benchmark Policy Rate Brazil 10.5 Russia 8.25 India 7 China 6 South Africa 5.5 Nigeria 12 Frontier Markets Rates Bangladesh 5 Egypt 8.25 Indonesia 7.5 Mexico 3.5 Nigeria 12 Pakistan 10 Philippines 3.5 Turkey 10 Ghana 18 Other Advanced Markets US 0.25 ECB 0.25 UK 0.5 Japan 0.1 Middle East Oman 1 Qatar 4.5 Saudi Arabia 2 Source: Bloomberg, Meristem Research Impact of events on the monetary policy terrain Certainty of a New CBN Governor in June Following the nomination of Godwin Emefiele, the MD of Zenith Bank, as the New CBN Governor from June 2014, the uncertainty surrounding who bears the mantle at the Apex Bank has been cleared. The choice, against all expectations, has generated a lot of questions as to what the direction of monetary policy will be going forward. Asidethe vast experience he will be bringing from his 26 years in the Banking industry, little is known of his policy preferences. However, we do not envisage any major monetary policy reversal because whatever monetary policy decisions are to be taken are usually put to a vote at the Monetary Policy Committee (MPC) meetings. The continued presence of headwinds to price and exchange rate stability suggest that changing the tight monetary policy stance anytime soon might not only be premature, but will also be detrimental to achieving the goals of monetary policy. Hence, the certainty of a successor to the outgoing Governor should bring respite to the markets and reassure investors. 6

7 Outlook relating to Foreign Reserves, Naira, CRR and Inflation The foreign reserve has been depleted by USD2.439bn (as at 20-Feb-2014) since the beginning of the year due to a slowdown in foreign portfolio and direct investment inflow and the aggressive defense of the naira on the back of increased demand for the dollar. In spite of these, the naira depreciated 0.03% and 1.75% at the official and interbank markets respectively. At the parallel markets however, the naira has appreciated 1.72% which can be attributed to increased dollar supply from the CBN. The decline in reserves has however prompted the monetary authorities to begin to look for other avenues of ensuring exchange rate stability. Of the measures under consideration is a further hike in CRR on public sector deposits to 100% should the foreign reserves continue on its downtrend. Also a hike on private sector deposits may be an option should there be need for further tightening measures. On a balance of factors, we do not envisage a significant decline in foreign reserves and the value of the naira in the near term. Barring any monumental shift in monetary policy stance and an enormous decline in the value of the naira, we do not see a major upside risks to inflation. What Next The liquidity tightening is expected to continue at least in the near term, for as long as the exchange rate stability is threatened and inflationary pressures remain on the horizon. Expected increase in fiscal and election spending and the increasing demand for dollars by foreign investors exiting the country and other Forex users all suggest that the end of the tightening cycle may not be in sight especially as the CBN remains committed to price and exchange rate stability. 7

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