2018 Investment Outlook

The Nigerian Stock Exchange (NSE) is consolidating its superlative gains of 2017 as revealed by closing figures of its benchmark indicators at the end of the first four trading sessions of the week between January 2 and 5, 2018
In the New Year, we expect recovery, growth and expansion of the Nigerian economy to continue through this year and influence the nation’s stock market to new highs, as the macro environment would likely support and boost the ongoing market recovery, despite the meaningful risks associated in stocks investing.
However, the increasing volatility in the market is likely to persist, but market players should target value and enhance it through a dynamic investing and trading approach, especially as 2018 is a pre-election year in Nigeria with its budget being the highest in the history of Nigeria as a nation. There are opportunities and uncertainties to navigate along the way. One of such is the possibility of increased liquidity as politicians and incumbent the governments spend money on campaign and election/re-election activities which in one way or other will trickle down into the stock market by way of increased demand for equities.
As noted earlier, the first trading week of the year has given an insight into what is expected in this first quarter as the volatility of 2017 continues on a bullish trend ahead of the markets major earnings reporting season that will kick off any moment from now with companies having March year –ends like Honeywell Flour Mills expected to present their nine-month score-cards this month. The bullish and recovery environment of 2017 has reflected on prices and although we expect new peaks from here, the pace of return is likely to be significantly higher in the first half of the year before moderating, owing to a likely sell down by foreign investors. This will however depend on the political environment the weeks and months ahead of the 2019 general elections, as the economy and market navigate increasing risks. Investdata believes the combination of higher returns and greater uncertainties make dynamic trading and investing strategies more imperative than ever before as we journey on in 2018.
Valuation for now is a serious concern as many stocks remain undervalued, despite the sustained rally in the market.

Macro-economic Outlook

Along with the political underpinnings of the economy at the moment, we expect Nigeria’s economic expansion to continue but in at a faster pace if the cost of borrowing is reduced by a deliberate easing of the benchmark Monetary Policy Rate (MPR) by the Central Bank of Nigeria’s Monetary Policy Committee (MPR) to further boost capacity, thereby driving sustained growth.
The monetary and fiscal factors supporting expansion and growth must be deliberately made powerful, meaning the fiscal and monetary authorities must focus attention on fixing whatsoever will slow down the ongoing recovery and growth. This, in turn, will make Nigeria’s economy a bright spot among emerging economies at a time policymakers and managers collaborate to drive economic growth that support politics, since without a thriving economy there is no politics.
In addition to a more positive economic data that had been rolled out in 2017, the CBN’s recently released Purchasing Managers’ Index (PMI) for December hit a record high of 59.3 points, compared with 55.9 points in November, indicating an accelerated growth in business activities, employment and inventories within the period.
The PMI measures the nation’s economic health through its manufacturing activities and shows that there was expansion in the Nigerian manufacturing sector for nine consecutive months last year, a situation that was attributed to stability in the foreign exchange market.
Remarkably, the production level index for the manufacturing sector expanded for the tenth consecutive month to 59.3, which points to an increase in production at a faster rate when compared to the 58.5 in the preceding month. The employment level index however staged a rather tepid increase to 53.9 from 53.7 in November.
According to the report, of the 16 subsectors surveyed, 15 recorded growth in activities, especially in areas like petroleum and coal products; and textile, apparel, leather and footwear.
These numbers signal that the economy remains on course for a pickup in growth this year.
The International Monetary Fund (IMF) predicts a 2018 economic growth of 2.1%, citing recovery in oil production on the back of peace in the nation’s troubled Niger Delta region, continued growth in agricultural sector, and higher investment to fix public infrastructure as key drivers as shown by the improved PMI numbers.
We believe sustained stability in the exchange rate of the Naira against major global currencies should provide some level of support for manufacturing output this year, especially if there is a cut in interest rates. Arising from oil production cuts by the Organisation of Petroleum Exporting Countries (OPEC) and challenges being encountered in some member countries, prices have remained above $60 per barrel, which is a plus for Nigeria’s foreign exchange reserves despite a production ceiling of 1.8m barrels per day.
We also expect the global commodity market to generally be range-bound, making it a key area for a more dynamic approach in asset allocation this year.

Inflation

We see inflation rate continuing its southward movement in 2018 after the expected December data that may likely remain flat or inch up to reflect price increase during the festive period.
Importantly, we think the main impact of inflation on asset prices will run through monetary policy, given the expectation that easing in 2018 will boost economic recovery and growth.
We still think the inflation bar is high for policy tightening to continue, irrespectively of the 10-month decline recorded in 2017.

Monetary Policy

We expect monetary policy easing at the beginning of 2018, before full-blown campaign activities by politicians and government begin to boost liquidity once more. The slow approach to easing by CBN’s MPC may limit impact, but when the MPR is cut it will be more significant than what the market is expecting, leading to pressure on bond and money market instrument with funds flowing out into the equity market, especially given the high dividend yield, which would expectedly broaden market volatility.

Politics

The pre-election year expectations and 2018 budget implementation policies/strategies may give room for surprises or dampened confidence that could reverse the positive trends enjoyed so far in the market and economy.
We believe Nigeria’s equity market will adjust appropriately to reflect any situation that is thrown up in the political space at any given time.
Specifically, we have some concerns about the chance of success of the international debt offering in today’s unstable global financial markets. The Federal Government has in recent years grown its domestic debt profile significantly, especially in a year where the prospects of liquidity in the financial system are high with government borrowing to finance infrastructure development and other needs. The government’s decision to flood the market with different type of bonds is already a threat to the capital market.

Conclusion

Investdata believes that Nigeria’s economic recovery will support the stock market as confidence in the whole system will boost savings and investment that will sustain growth, just as there is need to reduce interest rates, given that exchange rate has become relatively stable and expected to boost the real sector and the market to drive productivity and development.
We also expect that the government’s development and social projects would continue driving economic diversification which will boost liquidity and better the purchasing power of Nigerians.
We expect more primary market activities as developmental strategies from the regulators continue to boost confidence in the system, as we see more robust bull market in the first quarter and mixed performance in second half of 2018.
However, we would like to reiterate that investors should go for value equities, especially during this season that dividend payment is approaching.
We advise investors to allow numbers guide their decisions while repositioning for the rest of the year’s trading activities, especially now that stock prices remain volatile amidst improving company, economic and market fundamentals.
It is time to combine fundamentals and technical tools to take decision by knowing the support and resistant level to reposition or exit any position. Market is in phases know the cycles in order to manage your trading and investing risk. For stocks that should be on your shopping list to buy in this seasonality changes as the year winds down, sign up to INVESTDATA BUY AND SELL signal setup by calling 08032055467.
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Ambrose Omordion
CRO | Investdata Consulting Ltd
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