The financial services sector is on the upbeat, following the emergence of General Muhammadu Buhari (rtd) as the President-elect in the March 28 election. In this report, Capital Market Editor, Taofik Salako and Senior Finance Correspondent, Collins Nweze look at the underlying trends across the markets.
Nigerian equities are riding on the momentum of the successful conduct of the general elections. In the past eight trading session since March 28 presidential and National Assembly elections, equities have traded on the upside for six days, with two days of profit-taking discounted by another surge in demand for Nigerian equities.
Against the background of negative average year-to-date return of -11.81 per cent on March 27- eve of the presidential and national assembly elections, Nigerian equities opened today with a modest positive average year-to-date return of 0.8 per cent. Over the past eight trading sessions, Nigerian equities have retained capital gains of more than N1.58 trillion, in spite of the profit-taking that momentarily slowed down the stock market last week.
With the successful conduct of the presidential election and emergence of Buhari as president-elect, the negative sentiments and depreciation haunting Nigerian equities gave way to optimism and scramble for quoted equities. As indications emerged on Monday, March 30 that the March 28 general elections were largely peaceful and credible, and the opposition candidate of the All Progressives Congress (APC) was leading, investors upped demand for Nigerian equities. Quoted equities’ capitalisation, which opened the week at N10.319 trillion, closed Monday at N10.494 trillion. The eventual announcement of Buhari as the president-elect and the concession of defeat by President Goodluck Jonathan spurred the bullish rally.
Market data released by the Nigerian Stock Exchange (NSE) showed that the announcement of the presidential election triggered a massive bullish run that saw the largest gain by Nigerian equities this year. Nigerian stock market is dominated by foreign investors, who account for almost two-thirds of total transactions. Buhari had built his campaign on resolution of three core issues of corruption, insecurity and economic underdevelopment.
Aggregate market value of all quoted equities closed the four-day week ended April 2 at N12.135 trillion as against the week’s opening value of N10.319 trillion, representing an increase of N1.82 trillion. The benchmark index for the Nigerian stock market, the All Share Index (ASI), also jumped by almost six steps to close at 35,728.12 points as against its opening index of 30,562.93 points. The ASI, a value-based index, tracks the prices of all quoted companies and it is thus directly related to market sentiments. The stock market had sustained consecutive upswing, rising from N10.494 trillion on Monday to N10.718 trillion on Tuesday and N11.621 trillion and N12.135 trillion on Wednesday and Thursday respectively. The market performance was driven by increased demand for equities as turnover rose consecutively during the four trading sessions. Investors staked N1.84 billion on 196.26 million shares in 3,638 deals on Monday and increased this to N5.05 billion for 379.45 million shares in 4,138 deals on Tuesday. By Wednesday, turnover stood at N10.94 billion for 881.58 million shares in 4,611 deals. Turnover peaked at N18.75 billion on 1.17 billion shares in 9,006 deals on Thursday. Friday, April 3, was declared a public holiday in commemoration of Good Friday.
All key indices at the NSE have shown widespread positive sentiments, with most equities recording their highest gains so far this year. The renewed optimism helped the Nigerian market to reverse its dragging negative average-year-to-date return to positive, with modest average year-to-date gain of 3.09 per cent in the first week. By the close of trading on April 2, the ASI indicated average week-on-week gain of 16.90 per cent. The NSE 30 Index, which tracks the 30 most capitalised stocks, indicated higher weekly gain of 17.91 per cent. The NSE Banking Index recorded the highest gain of 23.97 per cent, reflecting the scramble for banking stocks. The NSE Oil and Gas Index, NSE Industrial Goods Index, NSE Consumer Goods Index and NSE Insurance Index recorded average weekly gain of 16.42 per cent, 13.62 per cent, 15.14 per cent and 3.46 per cent respectively. The NSE Lotus Islamic Index, which tracks ethical stocks on the basis of Islamic rules, also rose by 14.30 per cent.
Altogether, turnover within the first four days surged above average to 2.63 billion shares worth N36.58 billion in 21, 393 deals. The financial sector, driven by banking stocks, remained the dominant sector with a turnover of 2.06 billion shares valued at N21.06 billion traded in 12,133 deals; representing 78.1 per cent and 57.6 per cent of the total turnover volume and value respectively. The conglomerates sector was the second most active sector with a turnover of 178.25 million shares worth N2.352 billion in 1,493 deals while the consumer goods sector placed third with a turnover of 118.96 million shares worth N5.59 billion in 2,816 deals.
With the N1.8 trillion gains in the first four days, the market opened last week with a tinge of bearishness induced by profit-taking transactions from investors seeking to monetise their capital gains. Aggregate market capitalisation of all quoted companies, which opened last week at N12.135 trillion, closed the first trading session lower at N11.868 trillion. By Wednesday, the market value dipped to N11.608 trillion. The market however resumed the bullish run on Thursday with the market rising by N155 billion to close at N11.763 trillion. The market further consolidated the uptrend on Friday with a gain of N140 billion to close at N11.903 trillion. The ASI also started the week, dropping from its opening index of 35,728.12 points to close at 34,941.79 points. It dropped further to 34,175.24 points on Wednesday. However, the ASI picked up to 34,520.14 points on Thursday and rallied further to 34,930.02 points at the weekend.
Market activity also remained above average last week. The market opened the week with a turnover of 581.77 million shares valued at N8.31 billion in 7,587 deals. It rose to 704.06 million shares valued at N4.66 billion in 6,742 deals on Wednesday. Market turnover dipped to 601.18 million shares worth N4.17 billion in 5,724 on Thursday. Ahead of the April 11 State election, the expectant market railed on Friday with a turnover of 1.62 billion shares valued at N8.05 billion in 6,783 deals.
Major foreign and Nigerian investment firms have placed “buy” on several Nigerian stocks, a reference to the reduction in the political risk and the attractiveness of Nigerian equities, most of which had been undervalued by sustained depreciation over the past 15 months. Exotix, a global investment firm, described the successful conduct of the election and the emergence of Buhari as “unprecedented positive”.
“A broadly effective voter card system, largely peaceful voting days, generally orderly announcement of results, concession of defeat and most importantly, the win for the opposition candidate, comprise a remarkable, unprecedented and positive presidential election in Nigeria,” Exotix stated.
The firm noted that some macro level concerns which have driven Nigeria to underperform all major frontier markets have thus been removed. Exotix subsequently raised its recommendation for Nigerian stocks, especially banking and consumer goods companies.
“In contrast to the public apprehension that preceded the March 28 elections, the generally peaceful conducts of the Presidential election and the attendant acceptance of the outcome by major political parties has significantly doused political tensions and lifted investors’ confidence. The Nigerian equity market rallied 12.2 per cent in two days after President Jonathan conceded defeat, while yields were pressured downwards in the fixed income market as investors hunted for bargains,” Afrinvest Securities, an investment firm at the stock market, noted in a review at the weekend.
Analysts at Afrinvest Securities pointed out that the market will continue to draw on the positive sentiments that have characterised the elections. Analysts expected the momentum in the equities market to strengthen in the coming week on the anticipation that events in the polity will stabilise.
“As the curtain however finally draws on the cyclical election phase, we expect investors to further re-price risks in the Nigerian economy and financial markets, discounting for political risks. Consequently, we expect a bullish capital market next week, similar to the one witnessed after the presidential election,” Afrinvest Securities stated.
Market analysts said the bullish rally might help Nigeria to reverse its negative foreign portfolio investment (FPI) position. The latest FPI report by the NSE had indicated that there was “significant increase in foreign portfolio investment outflow”. The report showed that nearly three-quarters of the transactions on the stock market were done by foreign investors during the period, highlighting the dominant negative trend orchestrated by the foreign divestments.
The report, based on the latest available data for the period ended February 2015, showed that foreign portfolio investment outlook had so far been negative, with year-to-date deficit of more than N32 billion.
According to the NSE, foreign outflows totaled N81.60 billion in February 2015 as against inflow of N52.35 billion, indicating a significant increase on the downtrend that started the year when foreign portfolio outflow was N51.08 billion against inflow of N48.03 billion.
Year-to-date, total foreign inflow stood at N100.38 billion compared with outflow of N132.68 billion, representing net deficit of N32.3 billion. The report had underlined concerns that foreign investors were downsizing their portfolios. Nigeria recorded negative net foreign portfolio position of N154.14 billion in 2014 as against a positive net position of a modest N20.48 billion in 2013.
The latest report also showed continued dominance of the foreign investors in the Nigerian market with foreign transactions accounting for 72.61 per cent of total transactions in February compared with 27.39 per cent contributed by domestic investors. Foreign investors had contributed 52.24 per cent while Nigerian investors accounted for 47.76 per cent in January. Altogether, the proportion of foreign transactions to domestic transactions so far this year stood at 62.28 per cent and 37.72 per cent respectively.
The NSE report is generally regarded as a credible gauge of foreign portfolio investments in Nigeria as it coordinates data from nearly all active investment bankers and stockbrokers. Nigeria presently operates a mono stock exchange, which makes the NSE the sole gateway to the nation’s stock market and the NSE’s benchmark indices, the country indices for Nigeria.
The NSE report used two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the stock market as a barometer for the economy. Foreign portfolio investment outflow includes sales transactions or liquidation of equity portfolio investments through the stock market while inflow includes purchase transactions on the NSE.
The 12-month foreign portfolio investment report for 2014 had shown that foreign portfolio outflow was N846.53 billion as against inflow of N692.39 billion in 2014, representing a net deficit of N154.14 billion. In 2013, total foreign inflow stood at N531.26 trillion compared with outflow of N510.78 trillion, leaving a positive balance of N20.48 billion.
The report showed a notable spike in foreign transactions, although the negative colouration indicated that the propensity was towards divestment rather than investment. Total foreign transactions rose by 52.5 per cent to N1.54 trillion in 2014 as against N1.01 trillion in 2013.
The money market and foreign exchange market have also shown considerable upbeat since the presidential election. For the first time in many years, the official and parallel market rates for the Naira closed together at the weekend at N197 to dollar. The naira firmed more than six per cent on parallel market as individuals who had stockpiled dollars to hedge against political risk because of the general elections sold off their holdings, black market dealers said.
The naira firmed to N197 against the dollar on the parallel market operated by bureau de change (BDC) agents, the same level as the interbank market, from N210 naira last Thursday.
A BDC operator Mohammed Abdul explained that dollar demand has fallen to record low, as many travelers who left for fear of political crisis are returning, when the feared violence and instability did not materialise.
“There are too many dollars in the market with no naira,” one black market dealer told Reuters, adding that he had bought dollars as low as N226 just before the elections.
Analysts said the black market rally will be welcome relief to the central bank, which had been spending billions of dollars to keep the currency on an even keel. As of the end of last month, foreign reserves had dropped by a third to below $30 billion.
Managing Director, Standard Chartered Bank Limited, Bola Adesola, said the Bankers Committee, the group of banks in Nigeria, wants stability in the forex market and has met all legitimate demand in the market. She said that actions so far taken by the apex bank has led to the stability and convergence in the forex market between the interbank rate and parallel market rate.
Adesola also said that some of the speculative demand in the market has disappeared leading to the stability currently enjoyed. She said that the CBN is not a vending machine for forex, and therefore is not the only source by which users access the fund. She said that aside the official market, customers can also access the forex from international oil companies, and from bureau de change operators.
The Managing Director, Union Bank of Nigeria Plc, Emeka Emuwa said the Committee is also working on cutting the limit of naira debit card from $150,000 downwards when they are used abroad. This, he said would reduce the volume of forex that used by account holders, and channel same to the real sector of the economy. “The naira debit cards used abroad is putting a drain on forex that should be used in funding industries. Cutting the limit on this card will help the CBN in conserving forex,” he said.
Trading restrictions
Analysts at Bloomberg predicted the naira would face the prospect of a sell-off when the CBN removes trading restrictions imposed last year to reduce volatility. But the question for investors wanting to get back into Nigerian assets is when that will happen.
“If you buy local bonds now you have to factor in how much the currency will move. It’s a tricky proposition,” Claudia Calich, a money manager at M&G Ltd. in London, which oversees about $1 billion of emerging-market assets, said.
The naira has slumped 18 per cent against the dollar as oil prices collapsed by almost half since June, prompting the apex bank lower banks’ trading limits and introduce a new dealing system in February that prevents lenders from buying dollars on the interbank market without matching orders from customers needing to import goods.
The CBN also sold dollars to support the naira, cutting foreign-exchange reserves to $29.8 billion, the lowest in a decade, according to HSBC Holdings Plc. Those measures have left the currency overvalued, according to investors including M&G, BlackRock Inc. and Investec Asset Management.
“One of the first big challenges the new government’s going to have to face is what on earth to do with the naira,” Samuel Vecht, who oversees $2.7 billion in five emerging-frontier-market funds at BlackRock, said by phone from London on Wednesday. “Steps have to be taken to ensure reserves don’t keep falling.”
Yields on Nigeria’s $500 million of Eurobonds due 2023 fell 19 basis points to 6.02 per cent on, the lowest since December 8, and rates on benchmark naira bonds dropped 118 basis points to 13.81 percent, also the lowest since Dec. 8.
While naira forward contracts, traded offshore and exempt from the central bank’s restrictions, also rallied, they still suggest the currency’s depreciation is far from over. Naira six-month non-deliverable forwards fell 2.8 per cent to 233.50 against the dollar, the lowest since January 22.
The currency changes hands among unofficial money changers at 226, Alan Cameron, an economist at Exotix Partners LLP in London, said in a March 19 note.
The naira’s current interbank value is appropriate and the discrepancy between that and the parallel rate isn’t an indication that it’s under pressure, Emefiele had said at the last Monetary Policy Committee meeting on March 23 to 24.
The CBN may end the so-called order-based trading system introduced in February now elections are over, according to the Lagos-based Financial Markets Dealers Association, an industry body.
Sub-Saharan Africa Economist at Renaissance Capital and co-author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.
She said that while Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability.
Meanwhile, investors including Morgan Stanley, Aberdeen Asset Management Plc and Landesbank Berlin Investment GmbH cut their local bond holdings in the last quarter of 2014 as the price of crude oil, Nigeria’s main export and source of more than two thirds of government revenue, fell by 37 percent during the period.
While naira government debt offers the highest yields among 31 developing nations tracked by Bloomberg, foreign investors have to factor in the increasing risk of a currency devaluation that will hurt returns when converted to dollars.
However, most analysts agreed that the financial markets will still contend with the tough macroeconomic variables as the new government struggles to build on weak earnings and poor public infrastructure.
“Political risks have diminished but the other risks are still in place: a very low oil price and pressure on the naira,” Lutz Roehmeyer, who oversees Landesbank Berlin’s $1.1 billion emerging-markets debt portfolio, said. “You can still expect devaluation. I see a lot of local-currency investors waiting for that to happen before they re-enter Nigeria.”
Afrinvest Securities also noted that notwithstanding the current optimism, the continuous decline in the level of external reserves, low oil prices and fiscal challenges remain a drawback on investor sentiments.
Head, Research and Investment Advisory, Sterling Capital Markets, Sewa Wusu, investors would still wait to gauge the policy direction and economic management ability of the incoming government before making long-term commitments that can stimulate sustained stability in the financial markets.
He said while the share price trend would enable several companies to reduce their undervaluation, government will still need to do more to enhance investors’ confidence.
According to him, the medium to long term post-election performance depends largely on government policies, the quality of the economic management team and the general direction of governance.
“What the market is reacting to now is the success and credibility of the election and the president-elect. But companies will still tarry a while to look at direction of government policies,” Wusu said.
Managing Director, Finawell Capital Limited, Mr. Tunde Oyekunle, said the stability of the economy and resolution of major challenges such as power and insecurity would positively impact the capital market and provide a long-term support for the recovery of the primary market. Analysts agreed that such sustained medium-to-long-term stability will bolster the lackluster primary market, providing the economy with the much-needed funds to drive long-term growth.
But, nearly everyone agreed on the point-that Nigeria has started on a journey of hopes.
