Beyond election-related factors which are driving recent uptrend, we see reasons to believe that certain themes would be pivotal in guiding market direction over 2019.
In 2018, the market paid no heed to fundamentals; the correlation between the Nigerian All-Share Index and Brent prices during the period was –17.2%, compared to a 12-year historical average of +68.7%. Similarly, the correlation between the market and EPS in 2018 was –80.5%, compared to an 8-year historical average of +77.2%.
In our view, 2018’s sell-off was unsurprising bearing in mind the remarkable rally that characterized most of 2017. Hence, 2018’s cocktail of negatives (tighter financial conditions [higher US rates and a stronger dollar], trade tensions and political uncertainties in Nigeria) was greeted with apprehension.
Clearly, even though the market needed some price correction following the rally we saw in 2017, we do not think the level of weakness seen was warranted considering the fundamental backdrop of solid earnings and supportive oil prices. Looking on to 2019, we expect the market to revert to fundamentals as politics related “noise” clears up. Specifically, the Feds recent dovish tone, the stable outlook for oil prices, sustained the recovery in the local economy and improved corporate earnings, should buoy sentiment for Nigerian equities going forward.