Nigerian Stock Exchange in 2008: Looking Back, Looking Ahead - 2

2008: Looking Ahead
So, what promise does 2008 hold, especially knowing that past performance is no guarantee of future results? Will the market replicate or improve on the excellent 2007 performance or will it lose ground? How will various sectors and individual stocks perform?

Crystal-gazing is not an easy art and that gets more challenging in a market where unpredictable emotions tend to rule actions. However, certain factors should provide us a backdrop:

• There is no special new threat to the Nigerian economy that can be seen in the horizon, unless the government fails woefully to contain the Niger Delta problem and allows it to escalate. The market price for oil looks firm far into the year. If the promise of faithful budget implementation is carried through, resulting in infrastructure rehabilitation, the prognosis is for the economy to notch up in growth. Also, with a lot of capital raised by financial institutions, they should be in an improved position to support business and add some fillip to the economic tempo. In the worst case scenario, no deterioration is expected.
• There is also a growing swell of interest in the capital market, among the populace. This has been helped by the huge offer campaigns that have come from the financial services sectors. Though the greater majority is yet to understand and engage the stock market, the pace of conversion is significant. More participants coming into the market locally, coupled with growing external interest from international portfolio managers, are factors that can only firm up demand. In that context, price performance, beyond transactional swings, should show reasonable firmness. In effect, we see the market performing reasonably well, but whether better or worse than the out-gone year will only be seen with time. What the government is able to do about critical problems like the energy shortfall, will help to define the scope.

Where to Invest
As could be seen from the 2007 sectoral chart, almost every sector of the market could register some outstanding performers. That obviously says you may find a gem in any sector, only you have to keep searching.

• The banking sector is still a good attraction. Banks have raised a lot of funding lately and many are working to expand their business platform quickly, both within the local market and abroad. While there could be challenges of profitable application of funds and successful implementation of projects, Nigerian banks have proved to be very competition-driven. Part of their strength is in being able to capture much of the best human capital resource base of the economy. We feel comfortable with their potential for growth in business and returns. Just as in the past year, the best performance is likely to come from the younger, more growth-oriented ones: banks like Oceanic, Bank PHB, FCMB, etc, for instance.
• The growth expectations about the insurance sector, obviously behind their current strong play in the market, should be sustained for some time. Eventually, actual performance figures will begin to show if that expectation is justified or misplaced, which is when positions will be re-appraised. Besides, clear leadership and lagging profiles will emerge. So, in the immediate future, more positions in that sector are expected and we expect upward pressure on prices.
• If the government does take serious steps to rebuild roads and other infrastructure that are in bad shape across the whole nation, the construction sector could be getting increased activity. That will translate to revenue growth. So that’s a sector to keep an eye on while monitoring what government does about rehabilitation contracts.
• Reviewing the sectoral ranking will help you evaluate the performance of individual stocks in those sectors as you look ahead to what to expect. Those that continue to improve on earnings growth rates of the past year (as results are released) would obviously be good candidates for the future.

In all, the market has continued to show promise and was strongly in a growth direction in the past year. Perhaps only a portfolio concentrated in Transcorp would have suffered a serious setback. In effect, an intelligent spread of stock selection would have earned good money, even if not at a super-returns level. Sticking out one’s neck in the current year doesn’t seem intimidating, in that circumstance.

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