Capital market suffered 20% loss in 7 months, say analysts

20 December 2015, Lagos –  Amidst the sustained negative performance of equities on the Nigerian Stock Exchange, especially through the second quarter to the end of the year, Capital market analysts have put the total loss incurred at 20 per cent for the period between May 29 and now.

Nigerian-Stock-Exchange.NSE

Nigerian Stock Exchange, Lagos

In what looks like a post-mortem of capital market performance between May 29, when the current administration came on board and now, capital market analysts said a combination of the flight of foreign portfolio investment and a raft of monetary policy decisions have robbed off negatively on the activities on the exchange translating into a loss of 20 per cent within the period.

However, in separate interviews, market analysts admitted that the capital market had not performed poorly compared to the performance  recorded before May 29 2015.

In his review of the activities at the stock exchange since May 29, the Executive Director, Corporate Finance at BGL Group, Femi Ademola, told THISDAY that “If we use the Nigerian Stock Exchange (NSE) as a representative of the capital market, we may say the performance is tepid since the market suffered a loss of about 20 per cent since May 29, 2015. However, it is worthy of note that total trading on the market from May 29 to date amounted to about N420 billion, only a little lower than N425 billion recorded in the earlier part of the year.

“Trading at the OTC market also improved over the period with the NASD Plc recording an increase in trading activities from N1.64 billion from January to May 29 to N50.60 billion in December. In addition, the FMDQ also reported a significant increase in transactions in the second half of 2015. However, since the NSE is the most popular of the markets, it tends to be the barometer of the capital market activities, and rightly so; activities on the capital market have suffered a lull in the most part of the year 2015, especially in the second half,” Ademola argued.

Analysts at Eczellon Capital also agreed that the capital market has largely been volatile post May 29, 2015 with the bears dominating most trading sessions at the NSE.

A document from the company’s Research Department which was obtained by THISDAY stated that “Since the inauguration of the new government on the 29th of May, the All Share Index (ASI) of the equities market has shrunk by c.22.0 per cent, while yield on the FGN 2030 bond has declined as well from 15.5 per cent in May to c.10.9per cent as at December 9, 2015.

“The level of foreign portfolio investment into the country has decreased from N38.0bn in May to N25.6bn as at October 2015. This trend could be tied to the level of uncertainty concerning the nation’s FX environment in the midst of declining oil prices in the international oil market. As you are aware, the glut in the crude oil market is not abating and OPEC is not willing to cut back output anytime soon. This implies that the nation’s foreign exchange earnings would continue to be weak as oil is the nation’s key export commodity. Thus, the naira is expected to remain under-pressure coupled with the unwillingness of the CBN to release its hold on the currency (naira).

Meanwhile, while market watchers agreed that there has been a noticeable flight of foreign portfolio investment (FPIs) as the major highlight, opinions slightly differed as to the causes. While some ascribed it to largely domestic factors particularly the handling of the macro-economy including the forex regime in place, others insisted the causes go beyond domestic factors particularly the prevalent monetary policy of the Central Bank of Nigeria (CBN).

Analysts at Eczellon Capitals in the document further contended that “The lackluster performance of the All Share Index (ASI) could be tied to the high level of uncertainty in the nation’s macro-economic space occasioned by the delay in the composition of the Federal Executive Committee (FEC) and CBN’s (Central Bank of Nigeria) tough stance on the naira. Thus, investors are a bit skeptical of how the government wants to pilot the affairs of the economy in the face of declining oil revenues as well as the foreign exchange risk inherent in investing in the capital market amidst uncertainty on how long the CBN intends to hold on to the value of the naira.”

“Aside from the foregoing, the significant decrease in FGN yield post May 2015 is primarily on the back of expansionary monetary policy by the CBN since September 2015. In September, the CBN reduced the CRR (Cash Reserve Ratio) from 31.0% to 25.0%, which was slashed further at the last MPC meeting in November to 20.0%. The direct implication of these cuts is the attendant increase in system liquidity in the capital market which pushed bond yields southward as commercial banks channel a significant part of their extra liquidity into acquiring government securities,” the document stated.

Continuing, the document stated further that “It is important to note that price stability (naira stability) as well as a liquid foreign exchange market are key considerations for portfolio investors when making investments. The current condition of the Nigerian FX market does not sufficiently meet the foregoing requirements, which in turn unsettle portfolio investors, thus, the gradual exit of FPIs from the Nigerian market. Aside from the domestic challenges, the heightened expectation that the US Federal Reserve would commence interest rate hike this December could also be a factor as investors gradually take position by moving capital to a more safer and stable haven,” the document stated.

Ademola explained that the challenges being experienced by the economies of countries like China and Russia was impacting the global economy even as the effects are most felt in emerging and frontier economies including Nigeria.

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