2017 Equity Market Review and Outlook

In line with the strong global risk-on sentiment which has driven outperformance of risk assets across developed, emerging and frontier markets, 2017 was a stellar year for the Nigerian Equity Market as the benchmark All Share Index posted its first positive annual return in three years (+42.3%), ranking as the 11th best performer in the world and 2nd in Africa.

At the start of the year, performance was underwhelming against the backdrop of elevated macroeconomic risk and FX market distortions which weighed on sentiment. However, improved flexibility with regards to administrative structure of the FX market – particularly the introduction of the Investors’ & Exporters’ Window – at the turn of the first Quarter marked a turning point in FX market stability and investors’ perception of the Nigerian market. Sentiment was further bolstered by resilient corporate earnings, recovery in the oil market and improved domestic oil production which moderated the risk profile of the Nigerian economy. These fuelled a year-round bull run on the Nigerian Bourse, with the All Share Index touching a 3-year high of 39,534.14 points in the first week of December, eventually closing the year at 38,243.19 points.

A look at sector performance shows all indices closed in the green. The Banking index unsurprisingly outperformed other indices for the second year with a Y-o-Y return of 73.3% as earnings remained resilient while investors also repriced assets due to favourable macro environment and corporate fundamentals. FIDELITY (+192.9%), UBA (+128.9%), ACCESS (78.0%), ZENITH (73.8%), DIAMOND (+70.5%), ETI (+65.4%) and GUARANTY (+64.9%) were the best performers amongst peers. The Consumer Goods index trailed, appreciating 37.0%, driven by rebound in earnings following increase in product prices and lower cost ratios which bolstered margins. DANGSUGAR (+227.3%), INTBREW (+194.6%), DANGFLOUR (+185.9%), NASCON (+117.6%), NESTLE (+92.1%), FLOURMILL (+70.9%), HONYFLOUR (+61.5%) and CADBURY (+52.3%) were the best performers in the sector. Similarly, the Industrial Goods  index appreciated 23.8%, driven by Cement manufacturers - CCNN (+90.0%), DANGCEM (+32.2%) and  WAPCO (+15.8%) - which benefited from expansion in profit margins consequent on increase in cement prices and improved energy efficiency.

Gains in NEM (+58.1%), CONTINSURE (+41.4%), LINKASSURE (+32.0%) and MANSARD (+15.6%) powered the Insurance Index to record a Y-o-Y return of 10.4%, while the Oil & Gas index significantly lagged other indices, returning 5.8% Y-o-Y due to lacklustre performance of downstream Oil & Gas majors – FORTE (-48.5%), MOBIL (-30.3%) and TOTAL (-23.1%)  - affected by higher landing cost of regulated products which stifled margins. Hence, upstream focused companies - SEPLAT (+64.8%) and OANDO (+27.4%) – were the major drivers of returns as earnings outlook improved following cessation of attacks on facilities in the Niger Delta region.

Our near term outlook for the equity market remains positive due to improving fiscal and current account balances – supported by rising oil prices – which is expected to have positive knock-on impacts on FX market stability and earnings. However, a major downside risk is the upcoming General Elections which could weigh on polity stability and lead to more short-term thinking in economic policymaking.