EUR 4.00 For Business Accounts Only

Nigeria Strategy Report H2 2018 Excerpts - Equities: The divergence… fundamentals or sentiment?

• Coming into 2018, the Nigerian equity market opened on a positive note hinged on a confluence of factors – rising commodity prices, production and the pro market FX policies. The interaction of these factors boosted investor’s confidence with the outcome seen in January wherein the equities market gained 16% MoM. However, the bull run reversed in subsequent months hinged on the possibility of an aggressive policy tightening by the US Fed. Consequently, we saw foreign flows into the Nigerian equity market gradually dissipate. For context, the equities market in the first half of 2018 saw a net foreign outflow of N4 billion relative to the net foreign inflow of N335 billion in H2 17. Nonetheless, the market ended the first half of the year in the positive, gaining 0.1%.
• Over the rest of the year, direction in the equities market will be determined by developments on the global front. Specifically, the U.S. Federal Reserve guides to two more rate hikes before the end of 2018 even as the economy witnessed impressive economic growth of 4.1% in Q2 18. Therefore, the confluence of continued monetary policy normalization and improving growth picture in the U.S. guides to significant moderation of foreign portfolio inflows into the equities market. Further limiting flows is the uncertain political landscape ahead of the 2019 elections. Against this backdrop, we estimate flows to the equity market to decline to $950 million over H2 2018 (H1 18: $1.42 billion, 2018: $2.38 billion). Accordingly, with our outlook of shrinking participation by foreign investors, the focus should remain on how local investors are well positioned to keep the market lubricated. On this wise, our view regarding higher FGN government borrowings and rising U.S. treasury yields raises the prospect for higher yields on FI instruments which could extinguish appetite for risky equity assets.