Uncertain days ahead for equities, investors

Jonathan

Nigerian equities lost N354 billion in two days of announcement of the suspension of the Central Bank of Nigeria (CBN) Governor, Mallam Sanusi Lamido Sanusi by President Goodluck Jonathan. Capital Market Editor, Taofik Salako, reports that most pundits still expect further capital flight as investors scramble away from the uncertainties foisted by the unprecedented move.

Nigerian financial markets appear to be in the cold and investors appear to be uncertain of the days ahead. The only time-tested certainty for most pundits and investors is the scramble for safety, quick exit to watch the direction of event. Thursday’s suspension of the Central Bank of Nigeria (CBN) Governor Mallam Sanusi Lamido Sanusi by President Goodluck Jonathan is riveting the financial markets. Investors in Nigerian equities have lost N354 billion between Thursday and Friday as sudden upsurge in sale orders on Thursday tripped the hitherto bullish market situation. Market capitalisation of equities dropped by N167 billion on Friday, in addition to N187 billion lost in immediate reaction as the news of the suspension broke out on Thursday.

Aggregate market value of all quoted equities dropped to a low of N12.301 trillion as against its opening value of N12.468 trillion. The benchmark index at the Nigerian Stock Exchange (NSE)-the All Share Index (ASI), indicated a daily average decline of 1.34 per cent, bringing the decline since Thursday to 2.81 per cent. The ASI, which tracks the values of all quoted companies on the NSE and as such serves as country index for Nigeria, had declined by 1.47 per cent on Thursday. The ASI closed yesterday at a low index point of 38,295.74 points as against its opening index of 38,816.19 points. As the news of the suspension filtered into the market on Thursday, aggregate market value of all quoted equities dropped by N187 billion from N12.655 trillion to close at N12.468 trillion. The ASI also dwindled to 38,816.19 points as against its opening index of 39,397.09.

Analysts were unanimous that the downtrend was in reaction to the suspension of the CBN Governor. Aggregate market value of all equities at the NSE had witnessed sustained rally between Monday and Wednesday. It opened the week at N12.427 trillion and built up successively to N12.528 trillion, N12.530 trillion and N12.655 trillion on Monday, Tuesday and Wednesday respectively. The ASI had also sustained steady rally prior to the reversal on Thursday. ASI opened at 38,767.29 points and built up to 38,964.75 points, 38,972.56 points and 39,397.09 points within the first three trading days.

The Nation’s review at the weekend showed that market considerations of most equities at the Nigerian Stock Exchange (NSE) crashed to their low on Friday. From the banking to manufacturing to downstream oil sectors, most leading equities slipped to their lowest prices this year at the weekend. Most banking stocks fell to their lowest market considerations. Share prices of multinationals, which usually feature largely in portfolios of foreign investors, highlighted the panic among foreign portfolio investors.

“The uncertainty surrounding policy direction and political risk in the economy brought on by the foregoing (suspension of Sanusi) is likely to spur further capital flight to safer regions or safer asset classes. With foreign portfolio investor’s constituting 50.0 per cent of the Nigerian stock market, any significant amount of capital flight is likely to have weighty consequences on the market. Since this development, the NSE ASI has lost a total of 2.8 per cent, due to selling pressures emanating from foreign and local market players reacting to the news. The true impact of this development is however yet to unravel as the news continues to filter across markets and participants,” Afrinvest (West Africa), a major investment firm, stated at the weekend.

According to analysts at Afrinvest, the particular significance of foreign portfolio investors in the economy will be revealed in the days ahead as investors scramble to safety. Blue chip stocks with significantly diversified foreign interest will be the most likely culprits of this capital flight.
Emerging market strategist, Standard Bank, Samir Gadio, said “Sanusi’s suspension is a disruptive move which indicates that the CBN has de facto lost much of its independence.”

The circumstance of Sanusi’s exit and the issue of independence of the CBN are two issues that are of concern to foreign investors rather than the exit or the politics of his suspension. But many foreign investors appeared concerned about the negative view on the anti-corruption record of President Jonathan. The circumstance of Sanusi’s suspension- after the CBN Governor alleged and made public presentations on missing funds-some $20 billion, from the national oil company, has been the headlines for most global media reports, irrespective of the allegation of financial recklessness leveled against the suspended governor.

“I believe that most market operators had factored in the fact that Sanusi’s leaving could lead to some adjustments in monetary policies. The issue to investors in the Nigerian market will be the nature of his exit and whether it has undermined CBN independence. Another factor that will be of concern to investors is the economic and policy orientation of the newly nominated CBN Governor and his pedigree as an independent minded person. These two factors – an affront on CBN autonomy and lack of clarity on Mr. Emefiele’s economic policy orientation may be the reasons for financial market instability with possible exit of some foreign portfolio investors, depletion of Nigeria’s foreign reserve, pressure on Naira exchange rate and increase in fixed income yield in the next couple of days and weeks,” Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu told The Nation.

“Foreign investors are likely to sell Nigerian assets more actively in coming days subject to market liquidity constraints. So far Treasury bill and bond quotes are not really being shown by onshore brokers (or the bid-ask spreads are quite wide) which is typical of Nigerian capital markets during periods of pronounced stress. That said, we see yields moving higher in the near term, with the magnitude of the sell-off at the long end potentially being partially mitigated by the bid from domestic pension funds at a later stage,” London-based Gadio said.

Analysts at Afrinvest expect the ripples to move round the financial markets-from equities to bonds and currency exchanges.

According to analysts, there is an expectation that the yields on Nigerian sovereign bonds will cross the 15 per cent mark in the near term and also at the March 2014 bonds auction as investors weigh in on the decision of the Federal Government.

“This development is likely to lead to an increase in the country’s risk premium, thus requiring a re-pricing of yields to incentivise investors. This increase will undoubtedly raise the governments cost of borrowing, exacerbating re-current expenditure (over 65.0% in 2014). The country may also find it tough raising additional funds through Eurobond issuances and may be lured to raise the coupon to compensate for the higher risk perception. Nonetheless, the high yield environment should be attractive to Pension Fund Administrators which are major players in the bond market. This could serve as a buffer in reducing the increased upside pressure on yields over the medium term,” Afrinvest stated.
Market pundits expect further depreciation in Naira as the CBN battles to calm nervous investors. According to Afrinvest, Naira may depreciate by about 2.0 per cent this week, driven by increased demand for foreign currency by foreign portfolio investors seeking a flight to safety.

The capital flight could also have a telling effect on Nigeria’s foreign reserves. The Nigerian foreign reserves shrunk by $2.3 billion or 5.3 per cent from $43.6bn in December 31, 2013 to $41.3bn as at February 19, 2014. This was primarily used to defend the Naira, sustaining it within the CBN’s band N155/US$1 +/- 3 per cent against selling pressure triggered by foreign portfolio investments reversals. According to Afrinvest, foreign portfolio investments constitute 48.8 per cent of the total reserves, highlighting the significant impact of a drastic reversal on the country.

However, analysts at GTI Securities called for caution but expressed optimism that the momentum of the negative reaction might slow down in the days ahead.

According to analysts, the rampaging sell-off could drop significantly in the days ahead as many stocks have entered oversold position, creating attractive buy opportunities for discerning investors.