Nigeria equities in the time of coronavirus
Investors look beyond exchange rate readjustment
If a devaluation of the naira was the sole factor that decided the price of stocks on the exchange, foreign and local investors would be flocking to the Nigerian Stock Exchange Market (NSE) now. There is more, however, to a stock price than the devaluation.
On Mar 20, the Central Bank of Nigeria technically devalued the naira; making it cheaper to the dollar. It moved the rate the at which the dollar is sold to foreign portfolio investors from N366.7 to N380.2. The next day, the official exchange rate which was priced at N307/$ was moved to a “market determined” rate of N360 to a dollar. This isn’t without implication to the Nigerian stock market. Although some analysts believe that an exchange rate between 400 and 450, naira would reflect more the forces of demand and supply.
A devaluation should see foreign investors flock to the stock market given the low levels fundamentally strong stocks are currently trading. The Covid-19 outbreak coupled with the oil price slump are double whammies that have hit the Nigerian economy. Even so foreign investors aren’t investing, depriving the bleeding stock market the reprieve it needs.
Meanwhile, about 32 central banks across the globe have been forced to cut their interest rates following the outbreak of Covid-19. In effect, lower borrowing costs in advanced economies creates an opportunity for carry trade which should benefit emerging and frontier economies like Nigeria with higher rates.
However, the risky perception of the economy has made investors hold back cash, some take flight to safety causing the market to bleed further, while others turn bargain hunters – taking short term advantage of cheap stocks and selling off at a more favourable price.
Savvy investors make investment decisions on a number of factors. These include political climate, industry regulations, company earnings, economic conditions, regulatory consistency and clarity etc.
Unfortunately, poor political climate, economic conditions, policy obscurity and inconsistencies make the equity market in Nigeria less attractive to foreign investors at a time like this.
These factors have made investors thickly sceptical over the years. More recently, their doubts are about the role of a central bank that isn’t immune from political interference which has led to unorthodox policies that favour the federal government.
In the last week, the exposure of top officials of the federal government to the infectious disease has further complicated matters. Most are preoccupied with self-isolating while they await their tests and channelling their efforts at fixing a broken healthcare system – their only guarantee of survival if they test positive and develop severe symptoms. The health of the economy is now secondary as the global economy slides into a recession.
Standard & Poor (S&P), one of the world’s top rating agencies, downgraded Nigeria’s credit rating barely a month after lowering the nation’s outlook from stable to negative. Nigeria’s long-term credit was downgraded from B to B- on Thursday. S&P feared that Nigeria may not be able to mitigate the effect of low oil prices and at the same meet financial obligations with falling foreign reserves.
The nation’s foreign reserves dipped to $35 billion in March 2020 from $45 billion last June as it struggles to find buyers for 70 percent of its oil cargoes. An oil glut at record low prices has further dampened interest in the Nigerian stock market.
As at Friday, the Nigeria stock market had shed N1 trillion in market value while the outlook in the short to medium term remains bleak.
Changing the narrative isn’t a rocket science. Investors seek well defined, clear and consistent policies that are market driven. This resonates with the need for bold reforms from the fiscal and monetary sides of authority. Also, the CBN must regain its autonomy, quarantine itself against political interference, and must avoid being behind the global policy curve.