JP Morgan’s judgment on the removal of Nigerian bonds from its GBI EM indices could result to capital outflows estimated at $2billion while bonds investors seek to rebalance their bond portfolios, but there is less to the risks as it relates to equities.
Though, some analysts see a legitimate fear by equity investors that the actions of JP Morgan could lead to similar action by the Morgan Stanley Capital International (MSCI) Index who publish widely used as benchmarks for emerging and frontier equity funds.
Currently, Nigeria equity market return is in negative excess of 14 percent– the second largest compared to Nairobi stock market which is well below the water this year by over minus 17percent.
The poor outing this year has been heavily premised on the expectations that the FX market would be liberalised, in addition poor corporate earnings of listed equities. At the Nigerian bourse, bargain investors are positioning ahead of expected price rally post ministerial appointments.
While reviewing the impact, analysts at United Capital said, sentiment swung to the bearish note last Wednesday following JP Morgan’s announcement of the removal of Nigerian bonds from its GBI EM indices, “but this was short-lived as domestic institutional investors went bullish on fixed income assets due to attractive yields and expectation of a downward trend in yields in the near term.”
For the equities market, the analysts said they expect bargain hunting to be sustained this week as the coast seems clearer and valuation remains attractive, “we look forward to speculators locking-in on profit. We anticipate the market will trade sideways this week, tilting towards the positive”.
In line with some analysts expectations, the local bourse witnessed a mix of bargain hunting and profit taking sessions last week, but ultimately close in the green –this was in spite of JP Morgan’s announcement of the removal of Nigerian bonds from its GBI EM indices
The value of listed equities at the Nigerian Stock Exchange (NSE) increased by about N55billion last week as bargain hunters became enticed by opportunities in value stocks.
Week-on-week (wow), the benchmark performance indicator of Nigerian equities market appreciated by 0.60 percent from last week open level of 29,511.08 points to 29,689.08 points.
Though, Gregory Kronsten led team of analysts at FBN Capital said the JP Morgan announcement on the FGN bonds amounts to reputational risk for Nigeria, however they noted that they “do not see a sizeable exit by offshore equity players from the NSE, many of whom are dedicated Africa investors with a long term horizon.”
“Nigeria’s exclusion from the benchmark frontier markets equities index, in which it has the second largest weighting, would be a great surprise,” according to FBN Capital. In their view, analysts at Financial Derivative Company Limited insist that “the expulsion of Nigeria from a major emerging-market index is a blow to the country’s reputation in the international capital markets and a setback to its ambition to achieve greater integration into the global financial markets.”
“The move is likely to prompt a further sell-off of government bonds by investors tracking the GBIEM, thereby raising the cost of borrowing for the government. It could also prompt some domestic institutions into knee-jerk sell-offs, further pushing up yields on securities”, they analysts added. Research analysts at Meristem also anticipate government’s borrowing costs will increase, adding that “recent auctions have shown that the DMO and the CBN (when allotments were not filled, and OMO auctions were not held due to yields required by market participants) will not issue securities at any cost.”
On equities, Meristem analysts said “the performance of the equities market in the year so far has been partly due to the lack of participation by foreign investors, who have alluded to the currency not being ‘fairly priced’. And so, it had been widely anticipated that there might be a further devaluation of the currency to align with general market perceptions, although we note that the CBN has vehemently denied that it would pander to these expectations.
Iheanyi Nwachukwu
