Investor sentiment shuts liquidity flow

The feeling of many investors about the Nigerian stock market has further helped to put down the lid on money flows into the stock market.

Despite the market-wide belief that equities current valuation is compelling for value investors, weak sentiment by bearish investors that triggered recent sell-off has led to what analysts observed as correction in Nigerian stocks resulting to a loss of 8.56 percent year-to-date (YtD).

While investors shifted focus to the possible outcome of Monetary Policy Committee (MPC) meeting, which held Monday and Tuesday this week, the stock market sustained its bearish trend in the first three trading days of last week, but closed the last two trading days of the week in the green. The market also kicked-off this week on a negative note.

According to analysts at Morgan Capital, the second MPC meeting of 2014 (the first post suspension of the former CBN governor, Sanusi Lamido Sanusi) which came up this week March 24 and 25, 2014, investors are keen to see if the interim CBN governor Sarah Alade will follow the path of her predecessor by further tightening monetary policy.

Though the analysts said going into the new week, they expect improved activities in the equities market, especially from the banking sector as the earnings seasons continue with decent full-year performances.

Before the MPC outcome, these analysts noted: “The key focal points for investors going into the week of the MPC meeting will be: Will the key benchmark rate be increased from 12 percent, considering that the fourth coming general elections can potentially spike inflationary trends? Will we see a hike in the CRR for public sector deposits hiked to the much speculated 100 percent? Will there be an increase in the CRR for private sector deposit from the current level of 12 percent to 50 percent? It is our expectation that there won’t be any drastic change in the MPR and that CRR will at least be retained at current levels for both public and private sector deposits.”

Summary of price changes last week showed that 19 equities appreciated in prices higher than 18 equities of the preceding week.

Further buttressing the bearish outlook, 56 equities depreciated in prices lower than 65 equities of the preceding week, while 123 equities remained unchanged, higher than 115 equities in the preceding week.

“While equity valuation is compelling (especially on Financial Services stocks), we see headroom for further price weakness, as weak investor sentiment shuts liquidity flows. Foreign investors will remain on the sell-side as stimulus tapering in the US and local currency risk douse appetite for Nigerian stocks. Relatively, high yield on fixed income securities will taper risk appetite of local institutional investors, thus reinforcing our interim view on stocks. That said, at 6.2x P/E, Nigerian banks portend strong upside for value investors; a rare opportunity to “buy low,” with expectation of “selling high” when market returns to fundamentals,” said market analysts at UBA Capital.

Meanwhile, rising from their meeting last Tuesday, the MPC unanimously agreed that continuation of tight monetary policy was needed to consolidate recent gains. The cash reserve requirement on private sector funds was increased by 3 percentage points to 15 percent.

Nigerian policy makers may  have sought to calm investor concern following Sanusi’s departure, pledging to support policies that he put in place to stabilize the currency and lower the inflation rate to below 10 percent.

“It is a tightening of policy and signals the withdrawal of additional liquidity,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in e-mailed comments. “It falls short of dealing with the much bigger issues currently facing Nigeria,” she said, referring to lower oil earnings and the risk of higher spending as an election approaches.

 

 Iheanyi Nwachukwu