The Nigerian capital market is expected to bottom out completely by June, according to the forecast of Renaissance Capital, a Russia-based investment bank in its research report.

As a result, foreign investors are increasing their investment in stock in the market, especially in the banking sector.

Access Bank Plc, Diamond Bank Plc, Guaranty Trust Bank Plc and United Bank for Africa Plc now make up four of the stocks in Renaissance’s top 10 picks for the week.

According to Renaissance, ''we are cautiously optimistic and raising equity exposure. We were very negative about the immediate outlook for the Nigerian equity market at the beginning of 2009, and maintained a risk-averse stance through the first quarter of 2009, 50 per cent cash, 40 per cent fixed income and 10 per cent equity.

''This risk-aversion reflected our expectation that the Nigerian equity market would fall 40 per cent in the first quarter, it actually shed 37 per cent. However, we had not expected this to earn it the title of worst-performing equity market in the world over the period,'' it added.

The Nigerian stock market was described as the worst performing in the world early in the year by a London- based research company, Business Monitor International, stating that the country’s Gross Domestic Product (GDP) will drop from 6.3 per cent in 2008 to 3.6 per cent in 2009.

The report had said: “You could not have done much worse than investing in the Nigerian stock market in 2009. With the Lagos All-Share Index down 27.5 per cent since January 1, it’s the worst performing equity index in the world so far this year. Add to that a 9.2 per cent drop in the currency, and you are looking at a third of your investment gone in one month.”

But, in Renaissance's  report, it said: “Heading into the second quarter of the year, we continue to expect the middle half of the year to mark a bottoming-out phase for Nigeria’s equity market, underpinning a solid recovery in the second half.

“We are, therefore, comfortable that the capitulation of the first quarter will not be repeated in second quarter and are cautiously optimistic about the performance of the equity market. Accordingly, we have increased our equity exposure to a more neutral 30 per cent.”

According to the research report,  “The depressed level of stock valuations in Nigeria at the beginning of the second quarter of 2009, trading at Price/Earning ratio of December 2009 of 4.8x, on our estimates, highlighted that the equity market had fallen deeply out of favour. Nevertheless, equity remains the strongest potential alpha in our portfolio.

“Heading into the second quarter of 2009, our base case was that downside risks were abating, and that the current, volatile bottoming-out phase will continue throughout the second quarter, rather than a repeat of the capitulation in the first quarter of a 37 per cent fall.

''We still remain relatively risk-averse, but have increased our equity exposure to 30 per cent as against the 10 per cent  in first quarter of 2009,'' it said.

The allocation of equities in its Nigeria portfolio was raised to 30 per cent at Renaissance Capital, which said the world’s worst-performing stock market in 2009 is poised for a “solid recovery” helped by mergers.

Renaissance cut cash as a proportion of Nigeria holdings to 40 per cent from 50 per cent, and its fixed-income investment to 30 per cent from 40 per cent. Its previous equity apportionment was 10 per cent.

“We expect this market to bottom in the second quarter and are increasing our equity stance from significantly underweight to neutral,” London-based analyst, Matthew Pearson said in a telephone interview.

The brokerage expects the Nigeria Stock Exchange All-Share Index to record a loss of 10 per cent this year, which indicates a partial recovery from the benchmark’s slump of 32 per cent so far in 2009.

Of its Nigerian equity holdings, the Moscow-based brokerage is increasing its allocation for banks to 40 per cent from 30 per cent “as the sector’s depressed valuations now overcompensate for the market’s uncertainty and lack of confidence,” Pearson and colleague, Samir Gadio wrote in a research note weekend.

Banks account for 70 per cent of the benchmark by weighting.

Access Bank Plc, Diamond Bank Plc, Guaranty Trust Bank Plc and United Bank for Africa Plc now make up four of the stocks in Renaissance’s top 10 picks. Guaranty trades at 8.3 times the company’s earnings per share, compared with 29 in June 2007.