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By Chinwendu Obienyi
With the first half (H1) of 2022 over, analysts at Afrinvest have listed interest rates, corporate earnings, domestic rate policy, fixed income environment yield, FX earnings, pre-election politicking and Ukraine-Russia war as factors that will define the performance of the Nigerian equities market in the second half (H2) of 2022.
The local bourse had sustained a positive momentum from the prior year in the first half of 2022 with a return of 21.3 per cent driven by impressive FY 2021 corporate earnings, dividend payments, market stimulating corporate actions and robust system liquidity.
Also, investors trading on the floor of the Nigerian Exchange Limited (NGX) gained a total of N5.64 trillion during the period. But, bearish sentiments in the form of sell pressure is taking its toll on the market.
Although the NGX gained 1.27 per cent last week with investors earning N354 billion, its month-to-date performance now stands at 0.77 per cent and a year-to-date gain of 22.24 per cent.
Commenting on the development analysts say they expect investors to trade cautiously in the week ahead as they anticipate the H1 2022 earnings season. Afrinvest, in its newly launched report titled; Nigerian Economic & Financial Market H1:2022 Review and H2:2022 Outlook – Deeper into the Rabbit Hole, said that with respect to the changing domestic monetary policy landscape, its study of historical trends found inconclusive links between Monetary Policy Rate (MPR) changes and the movement of the benchmark index.
It added that data from its analysis suggests an indirect correlation (-0.3) between the MPR and NGX-ASI from January 2014 to June 2022.
“The result confirms our argument in the Domestic Review & Outlook Section that the link between the MPR (per se) and equities & bonds markets is weak. Nonetheless, monetary policy outlook is pivotal for forecasting market performance as other tools of monetary policy (one of such being OMO) can influence market activities more potently. Our base-case expectation is that the domestic equities market would gain 19.1 per cent in 2022, implying a moderation of returns in the second half of the year.
We expect an uptick in FI yields in H2 2022 to spur a slowdown in equities market performance, although expected earnings growth could counter this. By the end of 2022, we project EPS growth of 19.3 per cent year-on-year (y/y) compared to 90.8 per cent y/y in the prior year. Our projection is justified by continued broad macroeconomic recovery and positive sector-specific outlooks,” it said,
Afrinvest, noted that though the Nigerian market (dominated by domestic players) traded at a discount to the MSCI frontier market (19.0x) and BRICS peers (11.2x) in H1 2022, it expects asset rotation into higher-yielding fixed-income instruments in H2 2022 to deepen undervaluation.
“The biggest upside risk to our forecast is the potential for fixed income yields to flatten or decline in H2:2022 while on the downside, poor earnings growth could deter the outlook. Under the best-case scenario, we imagine that stable domestic monetary and FX policies alongside favourable global dynamics would enhance the attraction of the domestic equities market to FPIs.
Similarly, a positive resolution to the Ukraine-Russian war and/or a cooling down of the global commodities market reduces the pressure on input costs, particularly energy and grains. Furthermore, under this scenario yield in the domestic fixed-income space moderates in H2 2022, and the allure of the equities market improves with the NGX-ASI gaining +41.1 per cent by year-end.
In our bear-case scenario, we anticipate that the CBN would implement additional interest rate hikes in H2 2022 including clearing OMO auctions at higher stop rates to incentivise hot money inflows. Thus, an elevated interest rate environment should prompt investors to hunt for fixed-income yields which could weaken equities performance. In addition, rising interest expenses should compound woes for corporate earnings already confronted by high input costs, thereby worsening overall financial performance.
Factoring in other relevant considerations, our model predicted a 19.3 per cent loss”, it said.
