FRI, JUN 19 2020-theG&BJournal- The case for the weak performance of the Nigerian equities market over the years has been tied back to a dearth of strong, market-friendly policy reforms.
At the start of 2020, the plan to gradually remove implicit energy subsidies, alongside renewed impetus to pass crucial oil and gas sector legislation, seemed to be on the cards.
‘’We expected this might be the beginning of an institution of reforms that would accelerate economic growth and boost market returns, says Cordros Securities in their 2020 Mid-Year Outlook.
However, the investment landscape in 2020 so far has mainly been shaped by the unexpected pandemic. The virus outbreak quickly progressed to economic shocks, as many governments across the globe enacted containment policies, leading to significant uncertainties, which in turn resulted in capital flow reversals across regions.
Many other issues that have remained through the years – weak macros, weak corporate profit expansion, and lack of market-friendly reforms – also pressured returns and could ultimately amplify the length of time before market recovery as activities normalize across the globe.
‘’Given this view, the base case, for H2-20, forecasts is muted stock market performance. In our opinion, this will be punctuated by periods of rallies and sell-offs as the global market rebalances. Consequently, our themes for the equities market in H2-20 are built on external factors as the primary driver of market activities.’’
For Fixed Income, the market was far more volatile than is initially anticipated, again due to tangential impacts from the pandemic. At the start of the year, we expected that market yields would trend downwards across instruments.
‘’While this prognosis was generally accurate, we did not foresee the magnitude of decline or the level of volatility over the period. As expected, the substantial OMO maturity profile over the first half of 2020 resulted in significant demand in the market, which consequently pressured down yields,’’ Cordros said.
However, as the country’s macroeconomic fundamentals became more impaired following the significant decline in crude oil prices, market expectations changed, and the trend reversed.
Looking forward, we believe that market demand will still surpass supply over H2-20, which will result in market yields trending lower; an outcome which would be in favour of the FGN given the even more precarious revenue picture and expectation of prolonged macro weakness.
‘’That being said, we expect that yields would be supported from a precipitous decline by elevated inflation expectations, which if crystallizes would translate to even deeper negative real returns.’’
Cordros Securities played up the foreign portfolio investments in equities which has pared year-on-year since the resurgence witnessed in 2017 (+323.4% y/y), after the recession in 2015/2016.
In the years that followed, inflows into equities pared by 35.0% and 21.0% in 2018 and 2019 respectively. In 2020 so far, data from the CBN shows a moderate decline of 2.5% relative to Q1-19.
However, month-on-month declines following on from January 2020, when a 148.4% m/m growth to USD394.24 million pointed towards the potential for a strong year, reflect the apathy towards the country’s equities market. Flows fell by an average of 63.3% over the next three months to USD18.51 million in April 2020 – the 4th smallest inflow recorded over ten years from 2010.
The reason behind the weakness is not far-fetched, as the pandemic has resulted in economic pressure, leading to weak fiscal balances. At the same time, the naira has also come under immense pressure as the price of crude oil crashed. This pressure led to a tacit devaluation in April after the CBN realigned the currency across markets – the naira’s trading value was moved from c. NGN305.00/USD in the interbank to NGN360.00/USD, while the rates for sales across the different windows in the FX market were also readjusted to c. NGN380.00/USD. This move and the state of the reserves has stoked fears of a further devaluation later in the year, while the weak macroeconomic picture is an additional downside risk to market over the rest of 2020.
‘’Considering our views, underscored by the expectation that this situation will persist, which has implications for US dollar liquidity and by extension ease of access to and from the Nigerian market, we expect foreign portfolio inflows to equities to remain weak, which should contribute to soft market performance for H2-20.’’
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