BY: CHARLES ABUEDE
Equity market analysts are now openly expressing fears that consumer goods stocks such as Dangote Sugar, Flour Mills Nigeria, Nestle Nigeria and Unilever Nigeria, as well as industrial-focused stocks involved in cement production with a heavy gas composition in their energy mix, may emerge as losers from the faceoff in Eastern Europe between Russia and Ukraine, as their profit margins come under severe pressure.
On the flip of the coin, companies within the upstream oil and gas sector may emerge as top advancers in the aftermath of the crisis due to the current positive rally in crude oil price globally, now above $133 per barrel.
The lingering Russo-Ukrainian crisis may have yet to exert an immediate impact on Nigeria but it is likely to have significant effects in the coming weeks or months. However, analysts have reckoned that a prolonged battle could have ripple effects on inflation, economic growth and corporate performance in Nigeria and around the world as investors may likely continue to seek safer haven in assets like gold and other treasures, while staying underweight to equities with a preference for war and defence stocks, as well as commodity-focused companies.
The war may have been helping investors navigate hazy clouds in the Nigerian equities and commodities market, but the immediate impact is on crude oil prices which have risen 29.5 percent in February to $118.1 per barrel. While this appears it would have a positive impact on external reserves accretion for the economy, Nigeria’s falling crude production will continue to undermine potential gains in the short to medium term, leaving analysts to posit that the federal government is likely to struggle to achieve its revenue projections for 2022 due to weaker oil remittances from NNPC, despite oil price staying above its budget benchmark.
FSDH Research analysts have noted that “Nigeria is also likely to feel the impact on inflation in the coming months due to supply chain disruptions. For example, wheat is a critical input into many consumables in the country ranging from flour, baked products and pasta. Thus, we expect to see some pressure on food inflation in the coming months,” they stated.
Their assertions show that in the capital markets, Nigeria’s equity investors’ have not necessarily sold off equities in response to the crisis. For context, the benchmark NGX-All Share Index gained 1.7 percent in February 2022, fuelled by gains in upstream oil and gas stocks, such as Seplat Energies, after it announced the proposed acquisition of some of Exxon Mobil’s assets and the strong crude oil prices following Russia’s invasion of Ukraine, and a strong rally in newly listed stock, BUA Foods, which has since cooled.
Resultantly, from the foregoing and the expected impact, equity analysts at FSDH Capital say, “Investors don’t need to fret over the equities market in the near term. However, we highlight that consumer goods stocks such as Flour Mills of Nigeria, Dangote Sugar, Nestle Nigeria, Unilever Nigeria etc., will be big losers in the long run as the cost of production will rise due to rise in raw materials (wheat, maize, sugar, cocoa, LAB, etc.) costs.
“Similarly, cement producers and other industrial-focused stocks that have a heavy gas composition in their energy mix will likely face pressure on their margins as energy costs continue to surge. The lone winner will likely be upstream oil & gas companies such as Seplat Energies and Oando Plc, as they would reap the benefit of higher prices which would help counteract any cost pressures.
“That said, we remain downbeat on Nigerian equities. While gains in a few large-cap counters have kept the year to date return positive, we note that the broad equities market remains lacklustre. Recent earnings from key players in the banking, consumers and industrial sectors have done little to boost investors’ risk appetite. Lastly, we consider the equities market overheated and in need of a breather which may come once the dividend season is over. Thus, we advise investors [to] remain underweight domestic equities with a preference for short term debt instruments as well as alternative assets,” they concluded.
Elsewhere on the global scene, a series of sanctions by the international community, the widespread condemnation from the West coupled with companies’ continued suspension of operations in Russia have led to a significant decline in demand for Russian crude despite being offered at record discounts to international benchmark prices.
Largely, the sanctions have led to significant sell-off on Russian equities and fixed income instruments while the benchmark Russian equity index lost 34.7 percent in February, with Fitch and Moody’s cutting Russian credit rating into junk territory.
Away and far from the series of sanctions, the impasse between Russia and Ukraine has brought another headwind for the global economy in recent times with significant volatility across the equities market, commodities market and the global economy at large.
A snapshot of these markets since the beginning of the faceoff show that in the commodities market, oil prices have surged to multi-year highs, flirting above the $120 per barrel mark, as oil traders ignored Russian crude, creating strong demand for non-Russian crude. Also, Russia and Ukraine account for 30 percent of global wheat exports and the crisis is expected to slow down exports following sanctions and disruptions at Ukraine’s ports. In a similar vein, the price of benchmark US wheat futures surged 21.9 percent in February as a result of the disruption at the port in Ukraine, while it has gained over 45.3 percent so far in March. Similarly, metals were not left out with aluminium touching a record high, nickel reached an 11-year high and palladium closed above $3,000 an ounce for the first time in nine months.
For the global equities market, investors’ reactions were mainly whipsawed in a volatile end to February as investors weighed the likely impact of the crisis and sanctions on the economy and corporate performance. In general, global equities closed February lower with benchmark indices in the US – S&P 500 (-3.1%), DJIA (- 3.6%) & NASDAQ (-3.4%) –, and Europe – STOXX 600 (-3.4%), FTSE 100 (-0.1%), CAC 40 (-4.9%) & XETRA DAX (-6.5%) – heading southwards.
But, for all that has been witnessed in the face of the growing geopolitical tension which has roiled both the global macroeconomic and investment landscape in recent time, global equities analysts at FSDH Research have opined that prolonged battle in eastern Europe could leave retail investors shifting exposure to debt instruments as the flight to safety could help counteract the impact from monetary authorities in advanced economies, as well as the Fed’s policy normalisation.
“Looking ahead, the global economic and investment landscape is expected to remain volatile in the coming days, weeks and months. Investors will be forced to make decisions amidst unabating uncertainty as the global economic outlook is very dependent on the length of the Russo-Ukrainian conflict. A prolonged battle could attract further sanctions on Russia and continued ripple effects for inflation, economic policies, economic growth and corporate performance.
“Thus, we reckon that investors will continue to seek safety in haven assets like gold and treasuries. We advise investors to remain significantly underweight to equities with a preference for war and defence stocks, and commodity-focused companies (i.e. companies that sell key commodities like oil, gas, and other metals). In addition, we prefer retail investors [to] shift exposure to debt instruments as the flight to safety could help counteract the impact of the Fed’s and other policymakers’ policy normalisation plan,” they said.