Foreign exchange pressure and slow economic growth may stifle the performance of the Nigerian Stock Exchange (NSE) in 2020 despite currently being the best performing equity market globally..
The Nigerian equity market has appreciated 10.38 per cent as at January 24, having posted -14.6 per cent return at the end of 2019, as investors took flight to the low-risk fixed income of the country’s capital market, due to fragility of the economy, which made many listed companies to perform below expectation.
Although the Monetary Policy Committee (MPC) of the Central Bank Nigeria, CBN, believes its decision to restrict local investors, especially banks, from participating in the OMO bills auction, was responsible for the current growth in the equity market, but this could not stop the bourse from ending last year in the red.
Moses Ojo, Head, Research and Business Development, PanAfrican Capitals, argued that OMO restriction decision propelled foreign portfolio investors to move from the fixed income segment of the market due to the rate crash it caused in that segment of the capital market.
“Fund switching was the major factor that affected the performance of the equity market last year. Investors switched their assets from the equity market to the fixed income market. Before the restriction in OMO auction, investors preferred to put their money in the fixed income market, because they were getting higher return from the fixed income market than what equity investment could deliver. But the OMO restriction has made investors to switch to the equity market, because it offers higher returns than other markets,” he maintained.
He noted that should the government decide to borrow heavily from the bond market this year, this would adversely impact the performance of equity market, as the government will be borrowing N2.18 trillion to fund the 2020 budget deficit.
The Nigerian economy grew 2.3 per cent in the third quarter of 2019 while population is rising by over 2.6 per cent, with inflating rate accelerating to 11.98 per cent at the end of the year, which is one of the reasons the equity market underperformed last year.
Interest rate, a major driver of the equity market, has been stable for some time at 13.5 per cent, but inflation rating, which has been trending upward, has been a major concern for investors. To address the accelerating inflation rate, the MPC had last week raised Cash Reserve Ratio (CRR) from 22.5 per cent to 27.5 per cent to tighten liquidity.
The current uptick in the Nigerian equity market would continue into the year if the current stable interest rate subsist, Johnson Chukwu, Managing Director, Cowry Asset Management told Business Hallmark. However, he noted that the ease of doing business and infrastructure deficit in Nigeria would play significant role in the performance of the equity market as this would determine the profitability of listed companies.
“The subsistence of the current positive trend in the equity market would depend on other macro-economic factors play out. For instance, if the current pressure on the exchange rate continues, the Central bank may be forced to review its interest rate policy and that may change the outlook of all investable assets,” Chukwu explained.
Analysts from United Capital in their economic outlook for 2020 maintained that the continued auction of high yield OMO bills to Foreign Portfolio Investors, FPIs may keep foreign interest in local equity market tepid amid fears of a naira devaluation and confidence deficit in the economy, which would make FPIs to continue their flight to safety by swapping/selling equities for low-risk OMO bills.
“Yet, our outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch. From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity. However, this will not be enough to trigger a major rally in the absence of the demand from FPIs. Overall, our base case scenario, sees equities market return at +5.3% in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity,” they stated.
Meanwhile, the early passage of the 2020 budget which President Muhammedu Buhari signed early this month, would allow early disbursement of capital votes, and be an impetus for listed companies to perform better than last year, said Damilare Asimiyu, financial analyst with GTI Securities told Business Hallmark.
She reasoned that the Finance Act, which has come into force this January, exempts companies which declare less N25 million profit from paying company income tax and minimum wage increment would increase the disposable income of Nigerians and in turn impact the bottom-lines of quoted firms.
The average yield in the Nigerian fixed income market moderated from 14.5 per cent in December 2018 to 9.7 per cent at the end of last year.
Source: Business Hallmark