From the world’s best-performing equities in 2020, Nigerian stocks are losing steam as investors continue to sell their holdings despite impressive full-year performance of listed equities.
The weak sentiments followed an upward reversal in yields, prompting fresh interests in low-risk government bonds.
Since the start of February 2021, Nigerian equities have continued in a bearish trend to record their longest consecutive trading losses yet since March last year when the first wave of the Covid-19 pandemic triggered sell-off in stocks, according to data tracked by BusinessDay.
As such, investors lost N327 billion of their wealth, causing the market capitalisation of listed stocks to fall to N21.723 trillion on Tuesday, February 9, from N22.059 trillion recorded at the end of trading in January.
The uptick in yields in the fixed income market is the main factor driving the bearish sentiments in equities, according to Gbolahan Ologunro, an economist at Cordros Capital Limited.
“The market was expecting the reversal in yields in the second half of the year but it is happening sooner than expected,” said Ologunro.
Interest rates on bonds are reversing higher from a free-fall last year, caused by excess liquidity in the fixed income space after the Central Bank of Nigeria (CBN), in a move to drive real sector growth in a fundamentally weak economy, stopped local investors from participating in OMO bills.
Africa’s biggest economy is looking to raise debt to fund more than N5 trillion deficit in the 2021 budget, and with foreign capitals tumbling, it is doing everything possible to entice investors to commit their funds.
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At the last auction held on January 20, 2021, the Federal Government sold bonds across 10-, 15- and 25-year tenors with average yields climbing to a 4-month high of 8.6 percent.
The CBN also hiked rates on the short-term OMO instrument by an average of 467 basis points as it looks to attract portfolio investment which fell to a three-year low of $5.14 billion in 2020.
“The reversal has sent some shocks to the equity market,” said Paul Uzum, a Lagos-based capital market analyst.
“Before now, most money market players did not have any alternative asset class to channel their funds, especially when interest falls to near 1 percent, but since this year’s auction, we have been seeing higher yields even on savings bonds,” Uzum said.
When there is a shock like this, he said, stocks that are more liquid like the banks will react faster to the occasion.
While the low-interest-rate environment has worked in favour of large corporates to raise cheap debt, Uzum noted that a major implication of the reversal in interest rates will affect funding decisions of most companies.
“Before now, many companies were cashing on the low-interest rate environment to raise debt on the cheap, but with the reversal of yields, it would appear not too favourable for them,” Uzum said.
“In terms of longer-term implications for the economy, a higher interest rate will not encourage banks to lend to the real sector; rather, they will park their money in various instruments to grow their non-interest income,” he said.
Bonds are instruments issued to raise long-term debt beyond five years. The logic is that as yields trend higher, it gives new investors some comfort to purchase at a lower price. This is made possible because an inverse relationship exists between the price at which a bond is sold and the interest on the bond.
The low yields in the fixed-income space seen last year vis-a-vis rising inflation served as a blessing to equities as investors in search of positive returns flocked into the stock market.
The rush in stocks triggered a rally with Nigerian equities emerging best performer globally at 50 percent returns.
It’s 2021, yields are reversing higher and investors are rebalancing their portfolios back into the fixed income space to take advantage of lower prices.
Investors are turning blind eyes to the strong fundamentals of bellwether companies that have bucked the pandemic to deliver strong financial earnings.
From banking to consumer goods, down to oil and gas and industrial goods, the market closed red on Tuesday, February 9.
The Nigerian Stock Exchange All-Share Index (NSE-ASI) has fallen 2 percent to 41,529.07 points from 42,357.90 it started the month.
The Federal Government, through the CBN, is looking to issue treasury bills on Wednesday (today), and analysts say the defining factor for the equities would be the rates at which the short-term instrument will be issued.
“Things might go bad for Nigerian stocks depending on the outcome of the treasury bills auction on Wednesday,” one investment analyst told BusinessDay on Tuesday.
“If rates on T-bills go higher, we might see more investors exiting the stock market,” the person said.
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