Covid-19 pandemic, foreign exchange clarity to test market depth in H2

Unlike the past, when the dynamics of crude oil prices in the international market played a critical role in the performance of Nigeria’s equity market, due to the nation’s over-reliance on the commodity, the continued lack of clarity around Nigeria’s foreign exchange outlook, and concerns around the second wave of the covid-19 pandemic are set to test the long-standing correlation between Nigeria’s equity market and oil price.

The Central Bank has continued to maintain capital control resulting in illiquidity for current foreign investors to pull out their funds thereby discouraging investors despite cheap valuations.

Against the apex bank’s defiant initial stand not to devalue the naira, it recently adjusted the naira at official window by 15 percent to N360, I&E window by 5.5% to N381, more confusing is the fact that the Central Bank’s website still shows N360 as at the time of writing.

“Foreign exchange uncertainty is a major concern for foreign investors, despite opportunities in the market as most of the stocks are currently underpriced, investors are wary of fx uncertainty that could wipe off their gains, the fx crisis is not even oil related but cause by the CBN’S policy around the control of Fx,” Yinka Ademuwagun, equity & fixed income research analyst at United Capital plc said.

Ademuwagun said Egypt experienced a massive downturn in H1 2020 but the market has recovered because the market is free for investors to exit and enter into the market.

“With clarity coming back into the system on the back of IMF’S $2.7billion emergency support to Egypt and adjustment in the price of petrol, investors are back to Egypt after taking a flight during the pandemic, unlike Nigeria that did the opposite by locking foreign investors from leaving due to capital control of the CBN,” he said.

After tumbling by over 20percent in March 2020, Nigeria’s stock market recovered by more than half the initial downturn in the month of May amid increased demand by local investors, who have since dominated activities by taking advantage of cheap market valuation in fundamentally strong stocks; attractive dividend yield and sizable market liquidity; increasing indications that governments around the world will reopen their economies regardless of the anxiety around with foreign investors remaining on the sidelines.

According to Ademuwagun local institutional investors such as pension funds and insurance companies have very low-risk appetite while local retail investors are quick to take profit while foreign investors have a massive risk hunt because of their fund size.

“It would take a lot of convincing to bring the foreign investors back to the market,” he said.

In his view, Segun Olakoyenikan, a Lagos-based financial journalist said beyond the fluctuating oil prices, attention has shifted to issues such as fx liquidity crisis which has made repatriation of existing assets by foreign investors difficult; lack of clarity in the foreign exchange market, thereby creating uncertainty in the already volatile market and pandemic fears which have put businesses at risk as most businesses were designed to function in pre-covid.

Nigeria’s equity market kicked off the year on a high note with investors launching a sector-wide demand for stocks in the first month of the year, with the Nigerian stock market jumping 10.7percent in the first three weeks of the year, to emerge as the global best performer.

However, this was shortlived as the spread of the COVID-19 disease across the world precipitated into unanticipated financial market volatility, the reality of the COVID-19 pandemic also hit the crude oil market from late February and was exacerbated by a breakdown of the agreement between Saudi Arabia and Russia in March, the Nigerian stock market joined the rest of the world in a global financial market crash, tumbling more than 20percent by the end of Q1-2020.