‘Consumer goods companies’shares over priced, to fall further’

Despite the fall in the share prices of listed companies in the last two weeks, shares of many of the consumer goods companies remain slightly over-priced and will likely experience more corrections, said the Managing Director, Financial Derivatives Company, Mr. Bismark Rewane.

Rewane said that unlike the consumer goods sector, banking stocks are under-valued and have the potential to withstand the present downturn in the market.

Making the postulation in his bi-monthly review of the economy for June, 2013, ‘Bi-Monthly Economic and Business Update, he said, “At current level, the market remains slightly overpriced with a trailing price to earnings (P/E) of 13.9x and many of the consumer goods stocks still trading at a P/E of greater than 30x. We expect the correction to continue in this sector, although we do not expect an Armageddon as most stocks in the sector are defensive and are likely to weather the storm.”

He, however, stated that the market looks cheap on the banking sector perspective, saying, “All listed banks except Stanbic IBTC Holdco Plc, Union Bank Plc and Wema Bank Plc, are trading in single digit P/Es, with the most attractive being UBA and Access Bank with a P/E of 4.9x and 5.8x respectively.

“Given that stocks in the banking sector are held by portfolio investors with a long-term outlook and the strong earning power of the sector, we expect banking stocks to remain resilient even in turbulent times. Data also shows that there has been more buying than selling of tier one banks shares in the last three months, giving the sector a stamp of approval by investors.”

He added, “The major risk to the market, as we stated in our LBS publication in May, remains the price of crude oil and the exchange rate direction. Despite our bullish stance on the long-term growth of the index, we believe a structural depreciation of the naira could result in a major sell-off in the market. For now, we consider this unlikely, but the risk still exists.”

He further noted that the reversal witnessed so far has been sharper than the growth where the All Share Index reached 40,000 basis points in May.

His word, “The Nigerian Stock Exchange’s (NSE) All Shares Index (ASI) is experiencing a torrid June. After a strong performance in May and an impressive start to the month of June, crossing the 40,000 points along the way, the market reversal was sharper than the rise.

“The ASI suffered its first consecutive five-day fall, its longest losing streak in a year, with a compounded loss of 7.5 percent (2,987.94 points) in the five-day period between the 12th June and 18th of June. The loss was due to investors taking profit on stocks that had depreciated in the recent bull-run.

The month-to-date returns of -2.04 percent is the lowest monthly return figure since June 2012. Given the currency depreciation over the period, the loss in dollar terms amounted to 3.2 percent. The disruption that has gripped the bond market for over a month has now descended on the equity market as well.

Bond yields have been rising as prices decline as a result of reduced demand for FGN bonds by foreign portfolio investors. The situation has not been helped by the depreciation of the naira, which has exposed portfolio investors to forex losses.”
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