Nigerian stocks snap 7-year losing streak to post first gain in August

Equities trading in August welcomed the release of Nigeria’s Q2 2020 GDP data, which captured the full impact of the lockdown on economic activities induced by the pandemic.

The economy contracted by 6.1% y/y from 1.9% y/y in Q1 2020, making it the worst performance on record, according to the National Bureau of Statistics’ report.

That said, the stock market was relatively calm for most of the month and appeared decoupled from the rest of the economy. Despite the calmness, the NSEASI (up 4.6% QTD), advanced 2.5% in August outperforming the 0.9% gain in July and the 3.1% loss in June.

In terms of activity, while the average daily volume increased by a whopping 15.7% to 224.5 million shares, transaction value rose at a slower pace of 1.3% relative to July level.

The absence of foreign players further stoked silence in the market as Foreign Portfolio Investment (FPI) moderated by 91.1% y/y and q/q to $385.3m in Q2 2020, the lowest since Q1 2017. FPI flowed into the equities moderated by 89.3% y/y and 91.7% q/q to $53.3m.

We attribute the weakness in FPI flows to the nation’s currency crisis, with over $2.0 billion of foreign investor funds searching for an exit.

Furthermore, the extended delay in the submission of H1 2020 earnings from bellwether companies, particularly in the banking sector, hampered investment decision making for the local investors.

We are optimistic that the mid-to-long-term outlook for equities is positive, as economies across the world continue to reopen for business and the CBN can rein in the chaos at the FX market.

Nigerian equities are relatively still undervalued at 9.0x P/E ratio compared with Egypt at 11.5x, South Africa at 19.2x, and the BRICS markets at 17.4x.

This presents an attractive investment opportunity for long-term investors across selected sectors, which we believe are better placed, despite the fear of a looming recession by the end of Q3 2020.

As at the end of the first trading week in September, all the outstanding tier-1 banks have published their H1 2020 numbers, which showed resilient performances amidst the present economic woes. This further supports our mid-to-long-term positive outlook.