•Rally support for planned inclusive FX regime
•Naira appreciates at official, alternative markets

The hope of return of foreign portfolio investors (FPIs) to Nigeria’s market may not materialise anytime soon following MSCI’s potential reclassification of Nigerian indexes from the frontier to standalone market, experts have warned.

They believe that a sizable portion of investors currently tracking and holding naira assets do so due to Nigeria’s index classification as a frontier market.

Analysts at Cordros Capital said domestic investors would continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed-income yields would continue to constrain buying activities with the development.

The analysts argued that the development is exacerbated by a slow reform programme, which has damped foreign sentiments.

The analysts said: “Given the CBN’s unbanning of importers of all the 43 items previously restricted from the Nigerian Autonomous Foreign Exchange Market (NAFEM) since 2015, the market realised that FX supply is still minimal at the official market faster than we anticipated.

“Accordingly, importers have returned to the parallel market to fulfill their FX obligations. In addition, the incentives for holding the naira continue to be limited by the day, coupled with the panic-buying arising from the expectations of further currency pressures amidst limited FX supplies.

“Consequently, barring any significant FX inflows or convincing action by the policymakers to turn the tide, we expect the exchange rate pressures to linger in the short term.

“We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed-income yields may constrain buying activities.”

Vice President of Highcap Securities Limited, David Adonri, also stated: “MSCI’s planned reclassification of the capital market indicates the overall strength of the markets. After emerging markets, the least classification is frontier markets. Stand-alone is classless. It does not fit into any category because of its unpredictability.”

Also, Comercio Partners Research said the FX market has continued to grapple with liquidity issues, resulting in further naira devaluation.

According to experts, plans to broaden the official currency market to include bureaux de change (BDCs) and fintech firms indicate a recognition of the need for a more inclusive and agile system.

The experts pointed out that the successful implementation of proposed reforms is eagerly anticipated, noting that a transparent and efficient FX market is pivotal in stabilising the naira and attracting foreign investment.

This comes as the naira regained some lost ground at both the official and parallel markets last week.

The local currency appreciated by 2.3 per cent to N789.94/$ at NAFEM with total turnover at the market as of 26 October 2023) decreasing by 16 per cent week-on-week (WTD) to $361.09 million with deals sealed within the N644 to N981/$ band.

At the black market, what appeared like a storm stilled with the naira gaining over N100 per dollar. The currency traded at about N1, 300/$ earlier in the week but appreciated to about N1,160/$ at the weekend.

Experts said the market may be stable in the coming days as the Central Bank of Nigeria (CBN) is said to have started a clampdown on banks hoarding the hard currencies.

They believe that the local currency would regain stability if the CBN is firmer on de-dollarisation.

For instance, the Founder and Chief Consultant of B. Adedipe Associates Limited (BAA Consult), Dr Biodun Adedipe, had charged the CBN to stop government agencies from charging economic entities in dollars.

According to him, the sale of crude oil to local refineries should also be done in naira as a deliberate effort to stem the demand for foreign currencies and firm up naira.

“CBN should deal transparently with participating banks at the NAFEM. De-dollarise the economy by declaring as illegal any local transactions in dollars (sale of assets, rent/leases and other services, including school fees and medical bills) and ensure that government agencies stop charging local operators and entities in dollars (quite common in the maritime sector),” he said.

President Bola Tinubu, he said, should also have a direct engagement with bank CEOs to generate ideas and use moral suasion to enlist their support for the market reforms.

“Face the reality that unified exchange rates (not any different than floating the naira) is a poor policy choice for a structurally defective and weak economy like ours,” he added.

Amid the crisis, the Association of Bureau de Change Operators of Nigeria (ABCON) has asked the CBN to allow BDCs to carry out online dollar operations and point of sale (POS) agencies as part of measures to boost liquidity in the FX market and ensure exchange rate liquidity.

ABCON also urged the apex bank to give regulatory approvals to BDCs to have access to diaspora remittances, like receiving international money transfer operator (IMTO) proceeds.

On the equities market last week, the financial services industry (measured by volume) led the activity chart with 958.1 million shares valued at N14.4 billion traded in 13,270 deals, thus contributing 66.26 per cent to the total equities turnover volume.

The ICT Industry followed with 129.3 million shares worth N972.6 million in 2,722 deals. The third place was the conglomerate’s industry, with a turnover of 95.6 million shares worth N662.5 million in 1,664 deals.

According to the NGX, trading in the top three equities namely Access Holdings Plc, Fidelity Bank Plc and United Bank for Africa Plc (measured by volume) accounted for 447.283 million shares worth N6.568 billion in 4,877 deals, contributing 30.9 per cent to the total turnover.

Consequently, a total turnover of 1.4 billion shares worth N25.418 billion was recorded in 28,933 deals by investors on the floor of the exchange, in contrast to a total of 1.5 billion units valued at N24.3 billion that was exchanged hands in 29,298 deals in October.

On the price movement chart, investors’ renewed interest in Geregu (+20.6 per cent) and Seplat (+3.7 per cent) outweighed losses in MTNN (-1.2 per cent) and STANBIC (-2.6 per cent).

As a result, the All-Share Index and market capitalisation appreciated by 0.33.per cent to close the week at 67,136.58 and N36.885 trillion respectively, bringing the MTD and YTD return to +1.1 per cent and +31 per cent, respectively.

Trading activity showed a 1.6 per cent w/w decline in total traded volume but a four per cent w/w increase in total traded value. Meanwhile, performance across sectors was mixed following losses in the insurance (-1.1 per cent) and industrial goods (-0.2.per.cent), indices and gains in the oil and gas (+2.1 per cent) and banking (+1.0 per cent) indices, while the consumer goods index remained unchanged.

Reacting to market performance, the Chief Research Officer of InvestData Consulting Limited, Ambrose Omordion urged market players to take advantage of the ongoing oscillation and pullbacks in some major sectors of the market to reposition their portfolios as more quarterly scorecards are expected.

“The ongoing geopolitical tension will continue to drive global and domestic market volatility, so investors and traders anywhere in the world should factor this uncertainty into their trading and investment plans.

“It is important to trade and invest wisely ahead of events and factors that will shape the market in this last quarter of this year. Despite the mixed sentiment witnessed so far, the market’s big uptrend remains intact, amid a material shift in the index and the ongoing volatility.

“Despite the mixed volume pattern witnessed in recent days, it is time to shop for undervalued stocks, sector rotation, and go for defensive stocks at the next insider playing opportunity. All eyes are on the fiscal and monetary authorities to give direction to the government reforms and policies so far.

However, pullbacks are creating ‘buy’ opportunities amidst economic reforms. We note that discerning investors have continued to target sound companies and defensive stocks to protect their portfolios.

He said the direction of market performance will be shaped by the ongoing Q3 earnings season as investors cherry-pick sound stocks.

“Overall, we reiterate the need for taking positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.”

Cordros Capital said: “We expect the direction of market performance to be shaped by the ongoing Q3 earnings season as investors’ cherry-pick fundamentally sound stocks. “Overall, we reiterate the need for taking positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Further analysis of last week’s transactions showed that a total of 20,749 units of exchange-traded products valued at N1.4 million were traded in 75 deals compared with a total of 7,100 units valued at N1.124 million transacted in 66 deals during the preceding week.

Additionally, a total of 42,264 units of bonds, valued at N39 million were traded in 31 deals compared with a total of 187,866 units valued at N196.5 million transacted in 28 deals.