NSE allays fear of market distortions, hopeful of sustained rally
The Central Bank of Nigeria (CBN), had in October 2019, directed all banks to exclude individuals and local corporates from investing in Open Market Operations (OMO) auctions.
Within the period, local non-banks like Pension Fund Administrators (PFAs), individuals, companies, Non-Bank Financial Intermediaries, and state governments owned N7.5 trillion of the CBN bills as of September 2019 (before the CBN decision), which is equivalent to 42 per cent of the total.
Similarly, PFAs owned N2.3 trillion in CBN bills at the end of September, leaving N5.1 trillion in the hands of other local investors to be reinvested as these CBN bills mature.
The directive triggered a significant inflow of funds into the equity market, causing the market to rally strongly, with blue chips outperforming, and the all-share index up by 9.2 per cent between November 2019 and January 2020.
Surprisingly, as at close of trading in December 2020, the performance index had soared by 50.03 per cent, from a negative return of 14.60 per cent in 2019, making Nigerian stocks the best performing globally.
The All-Share Index (ASI), which stood at 26,842.07 basis points at the beginning of the year, closed at 40,270.76 points as of December 31, 2020, representing 50.03 per cent growth.
Similarly, market capitalisation increased by N8, 098 trillion to N21, 056 trillion from N12.958 trillion at which it opened trading for the year.
The CBN policy-induced rally extended the first trading month in 2021, as the ASI returned 2.0 per cent after 11 trading sessions, in anticipation of a bumper harvest in the current financial year.
At the NSE’s 2020 Market Recap and 2021 Outlook, the Chief Executive Officer of the Exchange, Oscar Onyema, expressed optimism that the market would record increased activities this year.
In addition, he said the policy would support refinancing as well as enable listed firms to offer new issuances and rebalance their capital structure.
“We believe that the CBN intends to see its policies pronouncements take the full course. We would not be expecting an immediate reversal of policy in terms of a low-interest rate. However, as investors are going to be chasing yields so, at some point, we would probably see some pressure coming to move some of those yields a little higher.
“That environment will support refinancing and already listed companies to do new issuances and rebalancing their capital structure. With regard to forex challenges, we believe that it is going to have to work its way through, given the economic realities that Nigeria faces, so in that context, we would continue to believe that the domestic investors are probably going to dominate the market activities in 2021.”
He disclosed that domestic investors dominated equity market transactions in 2020, accounting for 65.28 per cent of market turnover by value.
“Also noteworthy is that for the second consecutive year, equity market transactions were dominated by domestic investors who accounted for 65.28% of market turnover by value (Retail: 44.98%; Institutional: 55.02%) while foreign portfolio investors accounted for 34.72%.”.
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