Despite the poor start made by equities to the year, capital market analysts have expressed optimism about the market, citing low price of shares and the expected rebound of crude oil prices as factors that will boost equities.
In their outlook for equities this year, analysts at Vetiva Capital Management Limited adopted a 16 per cent return potential for the year.
According to them, while valuations appear relatively cheap, sustained pressure on oil prices will likely continue to constrain investor re-entry into equities.
Consequently, they said their 2015 expectation for Nigerian Stock Exchange All-Share Index was anchored on oil price performance in the year.
They said, “Using 16 year data, we establish a correlation factor of 72 per cent between Brent crude prices and the NSE ASI. Our assumption of Brent crude recovering to $70 per barrel by year end indicates a 22 per cent recovery from 2014 end position; thus, factoring in 72 per cent correlation suggests that amidst much volatility, the NSE ASI holds a potential 16 per cent return in 2015 to 40,201.56 points.
“Our scenario analysis indicate that at $100/bbl level, NSE ASI would hold a potential 54 per cent return for the year, whilst at $20/bbl price level, the return potential is -47 per cent.”
The Vetiva analysts also had a positive outlook for the fixed income market, despite headwinds.
They said, “We expect 2015 to open to healthy domestic demand for fixed income securities given the strong and positive real returns on offer and flight to safety from equities by pension funds. Along with strong domestic demand and relatively attractive re-entry levels, we see room for 150 basis points compression in yields in H2 2015 as macros become more benign.”
Risks to their outlook, according to them, include a quicker than anticipated increase in the Fed funds rate which could incite market sell-off and a lower-for-longer oil price which could leave the economy in a twin-deficit situation.
Analysts at Meristem Securities were more conservative in their outlook.
They noted that in 2014 the marketplace was “dulled by a collage of unfriendly events such as tighter monetary policy measures, Quantitative Easing tapering in the United States and the plunge in global oil prices.”
The developments had led the Nigerian bourse to close at -16.14 per cent for the year, “underperforming its African peers and global market indices as uncertainties weakened investor confidence”.
With the same challenges still existing, they said their outlook for 2015 was not too divergent from 2014.
They said, “On the back of this, we therefore expect higher country risk premium and cost of equity; thus, leading to a drop in market valuation independent of the companies’ fundamentals.
“Nevertheless, Nigerian market performance is expected to be driven by lower pricing, frontier market appeal, robust Gross Domestic Product, attractive demographic features and regulatory initiatives. We anticipate modest corporate performances (especially from the banks) and price appreciation.”
The Meristem analysts echoed the views expressed by African leaders and the NSE Chief Executive Officer, Mr. Oscar Onyema, at the World Economic Forum, that the continent and Nigeria remained attractive for investment.