The record gains across Nigeria’s major financial markets – majorly foreign exchange (FX) and stocks, is cooling off as investors watch the progress of implementation of some of President Bola Tinubu’s pro-market policies.
Tinubu has been warming himself to investors after wasting no time in announcing an end to Nigeria’s costly fuel subsidy regime and unveiling plans to adopt a single exchange rate. The president had in his inaugural speech on May 29 noted that the nation’s monetary policy needs a thorough house cleaning.
At the equities market, though investors continued to favour stocks in the oil marketing space, they maintained cautious approach across other sectors, thereby creating a tipping trend in other sectors within the market.
The market saw majorly sessions of profit-taking in the week ended June 9 as investors chose to take profit after recent rally. The Nigerian Exchange Limited (NGX) All-Share Index (ASI) and equities Market Capitalisation increased slightly from preceding week’s 55,820.50 points and N30.395 trillion respectively to 55,930.97 points and N30.454 trillion.
Akintoye Oyelakun, a portfolio manager at Cordros Asset Management Limited, said, “It is nothing serious, I just think that investors are waiting for the next big move. Once other economic data or earnings release kick-off, we would see more price movements,” he added.
At the FX market, the naira is seen depreciating against the dollar following strong demand for the greenback by individuals for travel allowances and school fees.
Nigeria’s currency on Friday slipped further against the dollar by 0.26 percent as demand increased at the parallel market. During the intraday foreign exchange trading on Friday, the dollar traded at the rate of N765 compared to N763 on the previous day at the black market.
At the Investors and Exporters (I&E) forex window, the naira depreciated by 1.02 percent as the dollar was quoted at N469.50 as against the last close of N464.67.
Most currency traders who participated at the foreign exchange auction on Thursday, June 8, had maintained bids between N460/$1, lower and N476.50/$1, higher bid.
Naira has since last week steadied at N464.67 per dollar at the Investors and Exporters forex window despite a decline in the market liquidity on Wednesday.
Lagos-based Vetiva analysts in their June 8 note observed that it was a positive day of trading in the fixed income (FI) secondary market, as yields eased across the bonds and Nigerian Treasury Bills (NTB) segments of the market. “In the bonds space, yields across the benchmark bond eased two basis points (bps) on average, driven by interest at the short-long ends of the market.
Meanwhile, in the NTB space, investors reacted positively to the latest NTB auction results, as yields eased two basic points on average,” they added.
According to Guy Czartoryski-led team of research analysts at Lagos-based Coronation, “Clearly, there are multiple knock-on effects – and many opportunities – stemming from fuel subsidy removal. Removing fuel subsidy is, therefore, a US dollar saving for the Nigerian government.
“The stock market was enthused by the announcement of fuel subsidy removal, with the NGX All-Share Index gaining 5.23 percent the day after it was announced. Since then, the market has been more circumspect with barely any further gain in the index overall. We believe the market is beginning to assess the broad-based costs of fuel subsidy removal to listed companies.”
“International bond markets have been quick to spot this, with yields of FGN US dollar Eurobonds tightening across the curve immediately after the announcement. The average yield of six traded FGN Eurobonds fell from 11.7 percent immediately before the announcement to 11 percent at the end of last week. (An international rally in bonds, following the resolution of the US debt ceiling issue, was also a contributory factor.) Even then, this does not seem like excessive optimism to us, and we continue to believe that FGN US dollar Eurobonds represent good value,” Coronation analysts added.
Oluwaseun Arambada, research analyst at FBNQuest, said for the stock market, we are seeing some profit-taking following the previous week’s rally. The market seems to be cooling off after significant rally in the week of the presidential inauguration.
“In the FX market, the depreciation is related exchange rate unification idea touted at the inauguration speech”.
Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said “Investors are taking profits, the market moves up significantly. I believe that it is just a short-term correction. If the trend and confidence that has been provided by the government is sustained, we will begin to see the gradual movement. What we have been seeing is a sudden movement. So, there will be markets like that and in a bit of correction, we will begin to see that upward movements, depending on how confidence is sustained based on policy implementation of this new government”.
Muda Yusuf, chief executive officer, Centre for the Promotion of Private Enterprise, said, “For me the subsidy removal is positive and it definitely had an impact on the market and it will definitely have a positive impact on the market because from the way things are, it is just like something that is here to stay, at least, we didn’t see the amount of resistance we expected from labour.”
He said another bigger one which is the second subsidy issue is the foreign exchange unification. “In the foreign exchange unification, we have not seen the kind of consistency that we expected.”
Yusuf noted that when President Tinubu announced the need for FX unification, there was a positive response at the market, adding that at one point, a newspaper published that the CBN had devalued and then the CBN came out to say that they had not devalued and that the exchange rate is at 465.
“That statement contradicted what the president said and would have normally created some doubts in the minds of investors whether there is real commitment to this unification. Unlike what happened with the fuel subsidy, nobody came out to say that it was impossible but the unification, the CBN came out with a statement which I think was not proper. It might not be called devaluation or gradual adjustment.
“So, whatever that is happening to FX, I think it’s temporary. By the time the government takes a very firm decision on that and gives a clear directive to the CBN, something like a marching order, by the time we progress to the unification, the exchange rate will appreciate,” Yusuf said.
According to him, that conflicting statement or signal is not particularly good and the FX is much more important factor even than the fuel subsidy because the effect is more wide-ranging, more systemic, especially from the point of view of the market.
According to Aremu Oladimeji, a Lagos-based investment banker, “It’s normal for the initial move to normalise. When the market rallied on May 30, it was in response to the comment made by the president which fuelled optimism by market participants.
“Of course, until those policies are fully implemented, you wouldn’t see such increase on a consistent basis. The sharp rally was a way of investors saying ‘we like these policies”.
“As to why it may be declining now or sort of stabilising, it’s a normal trend of reverting to mean. It is also normal for some investors to seize the occasion to take some gains. But I believe we may also need to factor the impact of certain outlier companies (the heavy-weighted companies) that might be influencing the overall direction of the market,” he noted.