Investors and 2016

BY TESLIM SHITTA-BEY|     These are choppy times for investors in Nigeria, not only are they likely to face painful falls in the values of stock market investments, they are also likely to see significant diminution in the value of all other types of investments. Why? It’s the economy, simple. Already the government’s budget benchmark price of oil has been kicked in the gut with oil prices ranging from as low as $32 per barrel to as high as $34 per barrel in the course of the first week of the new year (this abstracts from the temporary one day spike of $39 per barrel when news broke out of a simmering diplomatic face-off between Saudi Arabia and Iran over the Saudi Arabian execution of a Shiite Islamic cleric).

Low international oil prices, therefore, suggests that the Federal Government’s fiscal budget projections for 2016 have been put under severe pressure as a major fall in anticipated revenue could lead to a widening of government’s budget deficit and a need to extend its borrowing more than it had earlier expected. This would mean the issuing of fresh rounds of treasury bills which would have to be priced at rates that would coax funds away from competitive private sector uses. In other words, the government’s fresh borrowing needs would raise short and medium term interest rates and elbow aside private sector loan demands. The flip side of this is that non-bank financial institutions listed on the stock exchange would find that they would be faced with higher finance charges in the course of the year, leading to lower after tax incomes (and inevitably lower dividends).

The troubles of quoted companies listed on the NSE would not be limited to higher financing costs. Another sore to itch would be the deteriorating availability of foreign exchange needed to import inputs. The higher naira to dollar exchange rate in unofficial markets would strain the treasuries of many of these companies and hurt their ability to produce replacement stock on a sustainable basis. What this means is that quite a large number of these companies would see gross earnings fall or at the minimum grow at significantly slower paces. What this means is that for growth investors (those that invest in companies that have prospects of strong earnings), this is going to be a very long and pitiful investment winter. For value investors (those that look for undervalued stocks), however, this might actually be a boon period as the market excessively penalizes companies for their difficult operating conditions.

The All Shares Index (ASI), for example, has already seen a New Year decline of -5.63 percent year-to-date (in other words in first week of the year) or a year –on-year decline of -7.45 percent. The weak market growth at the beginning of the year foretells the challenges that the market expects to see in the first two quarters. Even the hitherto, strong banking and finance sector is likely to be tossed by recessionary storms worsened by the removal of Commission on Turnover (COT) charges within the year and the implementation of the Federal Government’s Single Treasury Account (STA) policy which would reduce retail banking liquidity and ‘float’ incomes (incomes made from idle federal balances that should but habitually were not remitted to the central bank over long periods). Banking sector stocks are, therefore, not likely to be the pretty maidens they were in previous years.

On the other hand, stocks in the building and construction sector are potentially good buys for those not particularly interested in purchasing bargain basement stocks (stocks with market values that have temporarily been knocked down to the ground). Stocks such as Dangote Cement (current market price N 59.99 per share, p/e 14.5) and Lafarge Wapco (current market price N105, p/e 15.09) should see major value growth as the Federal Government’s capital expenditure on road construction and housing have salutary effects on these companies turnovers and after tax profits. Companies listed in the agricultural sector should also see marginal improvements in their performance as many of them have limited import requirements and are heavily reliant on local labour and commercial retail and wholesale markets companies such as Okomu Oil (current price N36.25, p/e 20.50) should therefore appear quite attractive to aggressive growth stock buyers.

Oil & gas stocks on the other hand are pariahs. Buying into the sector at the moment could prove very risky; the prospective removal of subsidy and the incessant disruptions to sales could hurt revenues and bottom lines during the course of the year. The horrible interim third quarter results of Oando for 2015 shows what could occur if industry outlook dims. The distortions in the local pricing of Premium Motor Spirit (petrol) and Dual Purpose Kerosene (DPK) have hobbled the retail business of major oil marketers. With the Federal Government breathing down their necks to supply and sell PMS at N86.50, a price they all consider only marginally profitable, the droopy faces of most petroleum marketing executives is a gritty sign of the times.

Investors are likely to have a fairly tepid year in 2016 as stock market values prove difficult to pull up against a tottering fiscal economy and shrinking consumer spending power. However since rolling over and playing dead is not a viable option for survival, investors may increasingly need to keep their eyes glued to the nation’s macroeconomic dashboard and move with speed and boldness.