United Capital hinges market rebound on forex stability

With the dominance of foreign portfolio investors in the nation’s equities market, United Capital Plc has linked sustainable market rebound to federal government’s foreign exchange policy disposition

The Head, Research, United Capital Plc, Kayode Tinuoye, who also called for increased local investors’ participation in the market argued that the uncertainty around foreign exchange has continued to impact on market sentiments.

He explained that given the dominance of foreign portfolio investors in the market, which stood at 54 per cent as at November 2015, there are strong indications that the Central Bank of Nigeria’s disposition to foreign investors would be a key driver of equities movement in 2016.

He added that market volatility and sell pressure has been majorly driven by capital flight, noting that there was need for increased local participation to insulate the domestic market from external shocks and currency volatilities.

Speaking on sectorial performance outlook for the current financial year, Tinuoye explained that the challenging business environment might constrain company’s dividend payout for full year 2016, especially for the banking sector.

“Given the dominance of foreign portfolio investors in the Nigerian equities market, (54per cent total flows in November), we believe CBN’s disposition to foreign investors will be a key driver of equities movement in 2016 as uncertainty around FX continues to impact market sentiments

“At low stock prices, dividend yields for value stocks are becoming increasingly attractive.Ordinarily, this should trigger buy-­in by local institutional investors, thus moderating the negative impact of FPI reversal.However, the challenging business environment might constrain company’s dividend payout for FY-16, especially the banks.

“The outlook on company performance in 2016 remains feeble hinged on rocky patch and a challenging business environment. For the banks, despite the expected reduction in cost of funds, earnings will be tempered by lower yields on investment securities as well as constraints on lending even as they continue to face degradation in asset quality on the back of exposure to risky sectors.”

For the consumer goods sector, he pointed out that though there were expectations for reticent growth in earnings on the back of lower interest rate environment, exceptional cost, government ‘s focus on social spending and 2015 low base, expected devaluation of naira and a shrinking consumer wallets would pose risk to the sector’s performance.

Tinuoye also explained that the bearish oil prices and expiration of hedging contracts would keep earnings growth for upstream oil & gas sector more or less flattish while the down stream players would likely post modest positive performance.

He added that the industrial sector was poised to post positive numbers on account of government’s focus on infrastructure and private investment even as players’ regional capacity expansion would also supports earnings growth.