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Stable Currency As A Tool To Stock Market Recovery

stable currency; stock market
Posted: Sep 19, 2016 at 4:40 pm   /   by   /   comments (0)

Instability in Nigeria’s foreign exchange market has put the Country’s currency under pressure, and dampened investors’ appetite in the stock market, Bamidele  Ogunwusi writes more about this.

Against the backdrop of current situation where foreign investors still held sway in the nation’s local bourse, market watchers are worried that if domestic investors are not expanded, the local bourse might face similar situation it witnessed during the global financial meltdown of 2007 and 2008.

The aftermath of the meltdown saw nation’s capital market lose huge funds, as the Nigerian Stock Exchange’s (NSE’s) All-Share Index fell from a height of 66,000 basis points in March 2008 to less than 22,000 points by January 2009.

Also, over N8 trillion or 70 per cent of the total market capitalisation of the Exchange was wiped out during this period.

Analysts noted that one of the major causes of the crash in the Nigerian capital market in 2008 was the massive exodus of foreign investors from the equities market.

Market watchers believed that the dominance of foreign was one of the major reasons why they keep dictating the tune in the Nigerian market. Hence, anytime they start buying, the bulls return and when they stop buying and take their profit, the bears take over again. This is one of the reasons for the back and forth movements in the market.

Currently, the market is witnessing a similar scenario, as foreign investors have sold off significant Nigerian stocks following the drop in the oil price and the local naira currency, instability in the forex market as well as insecurity due to Boko Haram attacks and militants activities.

Data from the Exchange showed that foreign and domestic investors intensified their exits from the market since the last quarter of 2014, selling out of the relatively liquid banking, consumer and oil sectors as the price of Brent crude, the bench mark against which Nigeria’s oil is priced, dropped.

The plunge in the oil price has put Nigeria’s currency under pressure and dampened appetite for assets in Africa’s biggest economy and chief oil exporter, prompting the Central Bank of Nigeria (CBN) to intervene repeatedly to try to prop up the local currency.

Following the low sentiment that had pervaded the nation’s bourse, total transactions decreased by 42.13 per cent from N155.85 billion recorded in June 2016 to N90.19 billion (about $0.29 billion) in July 2016.

Also, total transactions from January to July 2016 decreased by 44.38 per cent from N1,284.82 billion recorded within the same period in 2015 to N714.60 billion in 2016.

Domestic investors slightly outperformed their foreign counterparts by about 1.8 per cent. Domestic transactions decreased by 39.66 per cent from N76.08 billion in June 2016 to N45.91 billion in July 2016.

On a monthly basis, the NSE polls trading figures from major custodians and market operators on their foreign portfolio investments (FPI). FPI transactions decreased by 44.48 per cent from N79.76 billion in June 2016 to N44.28 billion in July 2016.

According to reports, monthly foreign inflows slightly outpaced outflows, as foreign inflows decreased by 44.82 per cent from N42.46 billion in June to N23.43 billion in July 2016.

Foreign outflows also decreased by 44.10 per cent from N37.30 billion to N20.85 billion within the same period.

In comparison to the same period in 2015, total FPI transactions decreased by 54.99 per cent from N696.46 billion to N313.49, whilst the total domestic transactions decreased by 31.83 per cent from N588.36 billion to N401.10 billion.

Highlights of the domestic composition of transactions on the Exchange between January and July 2016 showed that the institutional composition of the domestic market decreased by 36.09 per cent from N39.04 billion in June to N24.95 billion.

The retail composition decreased by 43.41 per cent from N37.04 billion in June to N20.96 billion. Institutional investors marginally outperformed their retail counterparts in the period under review.

In 2013, there was a major rebound in the domestic component, which led to an almost equal split in foreign vs. domestic transactions. This dropped in 2014 where FPI outperformed domestic transactions. In 2015, FPI dropped compared to 2014. However, it slightly outperformed domestic transactions in the same period.

Forex as impediment, the Director of Investment Banking, Chapel Hill Denham, Mr. Ayo Fashina attributed the drop in foreign portfolio investment in the country to volatility in foreign exchange.

He said: “Unless we fix the exchange rate issues, we cannot expect the foreign investors to come to the country.

“The Nigerian economy is driven by the capital market and if you look at our market, traditionally it is 50/50 per cent for both local and foreign investors.

But the market is now copping with only the 50 per cent of local while the other 50 per cent foreign investors have taken flight for safety because of uncertainty of foreign exchange rate.

Fashina urged the Federal Government to take more steps to increase the supply of forex in the country.

Apart from the instability in forex, speaking on the low sentiment on the part of domestic investors, the Managing Director, Cowry Asset Management Limited, Mr. Johnson Chuckwu, said due to the dominance of foreign investors and other factors, the equity market has faced a lot of headwind unlike in other climes.

He noted that retail investors are hobbled by a number of factors from investing in the equities market.

“One factor is the relatively weak confidence in the market as a result of the 2008 market crash, which many retail investors have yet to recover from .

“There is also the issue of wrong investment time horizon as most Nigerians expect their investment to generate returns within three months and cannot relate with the fact that investment in the capital market is of long-term nature.

“Other factors include the near complete lack of credit for investment in the capital market and the recent bear run, which has further scared the few retail investors, who were planning of returning to the market.

Finally, there is also the issue of returns on fixed income instruments being more attractive than returns on equity instruments,” he said.

Since education helps in improving financial literacy of investors, the most effective investor protection starts with a well-informed and educated investor.

Market analysts have called on the Securities and Exchange Commission (SEC) and the Exchange to collaborate with market operators for a better-structured public awareness campaign about the stock market.

Managing Director/Chief Executive Officer, Crane Securities Limited, Mr. Mike Eze, said that public apprehension of the capital market would substantially be allayed with a better structured public awareness campaign to be jointly anchored by NSE, SEC and market operators for the education of shareholders and the protection of their interests, especially the small stock holders.

He said the average Nigerian investor suffered considerably, with many losers being first-time investors, essentially unaware of the workings of the market and relying on rising share prices, hunches and herds syndrome for their share-buying decisions.

“While considerable efforts have been made by NSE and SEC to educate shareholders and address some of their complaints, I believe the public apprehension of the capital market will substantially be allayed with a better structured public awareness campaign to be jointly anchored by NSE, SEC and market operators for the education of shareholders and the protection of their interests, especially the small stock holders,” he said.

In the light of the lessons learned from the most recent stock market collapse, there is a need to strengthen the Exchange’s investor education/ awareness function, especially for retail investors and also by extension the foreign investors, to enable them adequate knowledge of the nation’s capital market.