Have stocks gained from Nigeria’s financial repression?
Nigerian stocks saw a short-lived gain from the artificially low-interest-rate environment until the Covid-19 pandemic struck.
The financial repression tactics employed by Nigeria’s monetary authority, which triggered low-interest rates on naira assets, peaked in the fourth quarter of 2019 and contributed to a modest rally in stocks.
In that period, Nigerian stocks rose 8.47 percent, according to data compiled by BusinessDay.
A low-interest-rate environment typically translates to a lower cost of borrowing for companies and leads investors seeking higher returns to invest in the stock market.
The outbreak of the Covid-19 pandemic and decline in global oil prices, however, eroded the early gains made as stocks consistently trended downwards through April to shed approximately 30 percent of investors’ holdings.
However, investors began taking advantage of low valuations and respite was restored in the market, improving the Nigerian Stock Exchange’s (NSE) year-to-date (YTD) performance to -4.42 percent as at close of market Tuesday.
The recovery of stock prices, notwithstanding, has been slow as foreign investors shy away from the Nigerian equity market due to the shortage of dollars.
But for the dollar shortage, stocks may have benefitted more from the low returns on fixed-income assets. The foreigners who tend to drive activity on the stock market have abandoned the market and the result has been obvious. Analysis of the domestic and foreign portfolio participation of the Nigerian equity market reveals that since November, the share of domestic transactions has outpaced foreign transactions monthly.
In the 10 months through July 2020, the share of domestic transactions – retail and institutional – in the equity market averaged 57 percent with foreign transactions at 43 percent.
While domestic transactions on the local bourse have grown at a compounding average of 2 percent since October 2019; foreign transactions have declined, similarly, at -11 percent.
“The financial repression policy in Nigeria has influenced activities on the local bourse as domestic investors have the controlling share of activities,” Gbolahan Ologunro, a Lagos-based equity analyst with CSL Stockbrokers, told BusinessDay.
Similarly, Oscar Onyema, CEO, NSE, said in one of his presentations to clients that, “as expected, domestic participation in the Lagos bourse has seen an uptick from 40 percent to 61 percent.”
Onyema said the increased participation of local investors in equities was due to the low-interest-rate environment, which had positioned the exchange as a viable market for the destination of private capital.
While the repression policy of the CBN may have increased domestic participation on the local bourse, it has also to an extent compulsorily exposed domestic investors to the high risk in the stock market amid the choice of settling for low yields or potential high returns in a risky market.
Prior to the policy, domestic investors were yet to recover from the 2008-2009 global financial crises that saw the NSE shed as much as 70 percent in value between March 2008 and April 2009.
The crisis was particularly painful. Some retail investors even suffered strokes due to loss of investments. This is because the financial fortunes of many retail investors are tied in some way to the market, either directly through investments or indirectly through the pension funds. Since then, domestic investors’ exposure has been redirected to fixed income securities that are risk-free and assure a fixed return.
According to Ologunro, the initial reaction to the steep decline in yields was evident in the share price of bellwether stocks; however, the gains have been wiped out almost completely by the global pandemic. For example, domestic investors who took positions in Nigerian tier-one banks, which most analysts will regard as safe bets for investors, would have had their value eroded by at least 19.3 percent year-to-date.
Zenith Bank plc bled by -10.22 percent YTD, GTBank (-14.48%), Access Bank (-35.50%), UBA (-16.08%), First Bank (-20.33%), respectively. Since the pandemic hit Nigeria, domestic investors have also applied caution, following steps of foreign investors in the local bourse.
Data from the NSE reveal that total domestic transaction slumped to N68.62 billion in July 2020 from N132.69 billion in March 2020, signifying a deceleration in the volume of transactions executed by domestic players since the economy got hit by the twin shock i.e. health shock and oil price slump.
Sadly, despite the gradual easing of lockdowns, recovering oil price and reopening of economies around the world, foreign investors have not returned to the Nigerian equity market despite a low valuation of fundamentally sound stocks.
The average Price to Earnings ratio of Nigerian stocks is around six times, less than half of the frontier market average of 14 times.
The dollar management policy of the CBN and the slow process of unifying the multiple exchange rates in the market have kept foreign investors off the shores of Nigeria, and weighing on loss reversals in holdings of domestic investors.
“We will continue to record low transactions from foreign investors in the NSE until the CBN takes the bold step of unifying the exchange rate,” an economist who pleaded anonymity told BusinessDay.
“The costs of the CBN’s obsession with naira and reluctance to unify the exchange rates as suggested by the respected international bodies outweigh whatsoever benefit the CBN perceives,” the economist said.