After three consecutive years of losses the All-Share Index (ASI) accomplished a marked recovery in the second half of 2017. As of August 2017 the ASI had gained 37.9% year to date (YTD), compared with a 2.9% YTD loss for the same period in 2016, and a 6.2% loss over the course of 2016. Despite the double-digit YTD gain, the market had still been in negative territory as recently as May 9, 2017 THE SURGE: The ASI has surged by around 47% since late April when recovery began. At the start of the year we projected a market gain of around 10% for 2017, based on cheap valuations. However, we also believed the market’s rally could be even stronger in the event that the central bank worked out a more suitable market-driven foreign exchange (FX) policy.

The largest driver of the equities market was the introduction of an autonomous FX window for investors and exporters, the Nigerian Autonomous FX Market (NAFEX), brought in by the Central Bank of Nigeria (CBN), which improved FX liquidity by facilitating price discovery through market-based two-way quotes formed on a “willing buyer, willing seller” basis. Following the implementation of NAFEX, average daily turnover has improved to $120m, up from the aggregate weekly supply of less than $150m supplied by the CBN before NAFEX.

The introduction of NAFEX has effectively transformed the Nigerian bourse from one of the worst performers globally to one of the best. Prior to NAFEX, the ASI had shed around 8.5% YTD at its lowest point in March 2017. The reduction of capital inflows by portfolio investors following difficulties in repatriating FX was largely responsible for the lull in equity market activity.

The issues surrounding FX liquidity were triggered by the CBN’s sharp reduction in FX supply, which was caused by the decline in oil prices. This was especially significant as the CBN is the market’s single largest FX supplier. Following NAFEX, the average daily turnover on the Nigerian Stock Exchange has improved from $8m between January and April 2017, to around $16m by September 2017.

Top Performers

Although the market recovery was broad based, the palm oil segment – which posted an average YTD gain of 76% after delivering a gain of 27% in 2016 – was the top performer among the industries we track. The palm oil segment has continued to benefit from both increased demand and favourable pricing, partially resulting from encouraging government policy towards crude palm oil imports. Domestic palm oil producers were able to effectively maximise their advantageous position with respect to sourcing FX, relative to palm oil importers, who are their major competitors, as the CBN has palm oil importers out of the FX window.

The food and beverages and the fast-moving consumer goods segments delivered average YTD returns of 64% and 51%, respectively. Although most firms saw their unit volumes decline year-on-year (y-o-y) – a result of a spike in product prices and continued inflationary cost pressures squeezing household wallets – profitability was still boosted by marked expansions in gross margins.

These profits were achieved from double-digit price increases and cheaper access to FX, additional consequences from the implementation of NAFEX. On average, we estimate that price increases across the board were in the 25-40% range among the broad class of major consumer names.

In addition, the products of domestic manufacturers, such as Flour Mills of Nigeria and Nestlé Nigeria, gained market share from rival import brands due to FX sourcing challenges for the latter. However, given the improvements with FX sourcing, we believe that imported competition will ultimately stage a comeback from the second half of 2017 onward.


Similar to the other non-financials, cement companies, which are up approximately 51% YTD, also reported strong y-o-y growth in earnings. Although Lafarge Africa and Dangote Cement – the two cement companies that we track – reported y-o-y declines in their unit volumes, price increases of around 70% y-o-y in Nigeria, their home market, more than compensated for the decline in unit volume. For instance, Lafarge Africa and Dangote Cement recorded an average gross margin expansion of around 3907 basis points y-o-y, coming on the back of these elevated cement prices. Going forward, we expect cement companies in Nigeria will to continue to benefit from the prevailing high prices of cement in the second half of 2017.


The banks were not left out of the market rally, having gained around 53% YTD. Coming into the second quarter of 2017, the general expectation was that there would be a positive uptick in banks’ earnings, as a result of the strong growth in funding income, which was driven by elevated yields on domestic fixed-income securities.

What has become clear is that beyond the benefit of pricing and yields, a number of banks have not been able to capitalise further via volume growth by beefing up their fixed-income securities holdings. This is largely because these high yields and improved liquidity on NAFEX have collectively contributed to a loss of deposits.

This was particularly evident in the results of Zenith Bank and FCMB, which saw a 1% and 13% y-o-y decline in funding income, in addition to 1% and 8% quarter-on-quarter decline in deposits, respectively, in the second quarter of 2017.

Double-digit y-o-y growth in operating expenses was another prominent item that featured in the results of most banks that have reported their earnings for the second quarter of 2017.

Perhaps the most topical issue for the banks in the second quarter was the $1.2bn Etisalat Nigeria – now 9Mobile – exposure. While the total exposure is large and includes almost all the banks we track, it is just shy of causing a systemic non-performing loan crisis. The $1.2bn exposure represents around 2% of banking sector credit to the private sector.

The average exposure for the 13 banks is estimated at around N40bn ($141.4m), which for the tier-1 banks is about 1.5-3.5% of their loan books. Although a number of banks – including Zenith, Stanbic and GT Bank – have partially provided for their exposures, the worst case scenario is that banks would have to take some modest haircuts whenever a strategic buyer is found for the company.

Valuation wise, our recommendations are skewed towards the non-financial names – mainly Dangote Sugar Refinery, Dangote Cement and PZ Cussons – given the benefits they are receiving from favourable pricing and the relative ease of sourcing FX, particularly compared to the conditions seen in the first quarter of the year. Currently, we see very limited upsides for banks given their broad-based rally.