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Odds favour the bears in early part of H2 over FX illiquidity

In this early part of the second-half (H2) of the year 2020, stock investors should still approach the market with caution.

Despite a positive open to the week that ushers in the H2, investors should still keep a close eye on economic data that will indicate the shape of economic recovery.

Though, looking ahead anxiety is likely to remain heightened as the epic fight against the Covid-19 pandemic continues.

This spells bad news for risk assets such as crude oil (Nigeria’s major source of dollar revenue) which will inevitably remain under pressure.

The domestic market remains pressured as the fear of the second wave of the Covid-19 takes a toll on investors’ confidence. This is in addition to declining Foreign Portfolio (FP) inflow which has slowed the level of dollar liquidity at the Investor and Exporters (I&E) Window.

Read also: Nigeria stock market decreased by 3.2% in June

Recently, MSCI issued a warning on a possible reclassification of the Nigerian equities market from a frontier status to a standalone status, citing FX illiquidity as the major challenge.

Market watchers believe that if there isn’t significant improvement in FX liquidity, the situation will continue to impact stocks pricing and cause the market to remain on the bearish path.

Since the outbreak of Covid-19 and its associated lockdown, capital flight has continued to dominate foreign participation in the stock market.

In May 2020, the total value of transactions executed by domestic investors outperformed transactions executed by foreign investors by circa 40percent.

A further analysis of the total transactions executed between the review month of May and prior month (April 2020) revealed that total domestic transactions increased by 11.15percent from N75.49billion in April to N83.91 billion in May 2020.

As at May 31, 2020, total transactions at the nation’s bourse decreased by 7.40percent from N128.67billion (about $332.22million) in April 2020 to N119.15billion (about $307.32million) in May 2020.

The performance of the review month when compared to the performance in May 2019 (N221.13billion) revealed that total transactions decreased by 46.12percent.

However, total foreign transactions decreased by 33.73percent from N53.18 billion (about $137.37million) to N35.24 billion (about $90.89million) between April and May 2020. Retail investors marginally outperformed Institutional Investors by 0.56percent.

A comparison of domestic transactions in May and prior month (April 2020) revealed that retail transactions increased by 4.38percent from N40.42 billion in April 2020 to N42.19 billion in May 2020.

The institutional composition of the domestic market increased by 18.96percent from N35.07billion recorded in April 2020 to N41.72 billion in May 2020.

MSCI said it will continue to apply the special treatment as announced on May 12, 2020 for Nigeria. This is expected to spur negative investor sentiment in the nation’s stock market.

The Nigerian Stock Exchange (NSE) has reversed the gains recorded in the wake of the year as evidenced in the position of its performance indicators which decreased to 24,479.22 points and N12.769 trillion as at June 30, 2020 from January 3, 2020 highs of 26,968.79 points and N13.019 trillion respectively.

While countries are slowly easing lockdown restrictions amid the COVID-19 pandemic, the International Monetary Fund (IMF) last week released its forecast for the global economy, expecting it to contract by 4.9percent in 2020.

In addition, IMF forecast for Nigeria sees the nation’s economy contracting by 5.4percent, as decline in crude oil prices, coupled with the lockdown put pressure on tax receipts for the government.

Oil prices came under stronger pressure early this week as the spectre of partial lockdowns returns due to sharp spikes in new coronavirus infections around the world, raising concerns about the pace of economic recovery and fuel demand.

With crude earnings accounting for 60percent of government revenue, and 80percent of exports, economists expect the sharp drop in prices to trigger a recession in the nation.

While the Nigerian equity market is still being impacted by the significant deterioration of liquidity in the Nigerian FX market, Lagos-based Meristem research analysts expect the overriding sentiment in the equities market to be bearish.

Also, as second-quarter (Q2) earnings season inch closer, Meristem envisages that investors will adopt a “wait and see” approach. “However, we do not rule out pockets of bargain hunting activities as the prices of some heavyweight tickers present an attractive entry point for investors”, the analysts stated.

Bargain hunting across heavyweight counters on the last trading day of last week had spurred the market to a positive close, after an otherwise bearish showing in the earlier four days of last week.

United Capital research analysts believe the path remains gloomy for equities, amid pressure on corporate earnings, concerns about the exchange rate and the second wave of the pandemic.

“As a result, we expect the market to remain highly volatile and short-term gain driven”, the analysts said. They noted that the market has rebounded in second-quarter (Q2) 2020 following optimism in the global and domestic market economy.

“The equity market almost recovered to its pre-selloff level largely driven by domestic investors who took advantage of the market valuation amid a mild recovery in oil prices in the month of May 2020”, said United Capital research in its recent H2 outlook report.

Analysts Afrinvest expect to see sustained profit-taking in early trading days of this week ushering the second-half (H2). However, they believe the negative trend would be reversed before the end of the week on account of bargain hunting by investors.

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