The last few weeks have not been kind to investors in Nigerian stocks. In the last 15 trading days, the market has gained only three times and those have been marginal- a very tone for the market had its best start to a year since 2013 at least.
A bullish run that started after the Boxing Day holiday stretched into 2020, helping the Nigerian Stock Exchange (NSE) record its longest gaining streak at the beginning of a year in over seven years.
The late “Santa Rally” was on the back of increased liquidity due to a policy by the Central Bank of Nigeria (CBN) to restrict participation in the primary and secondary Open Market Operation (OMO) as a way of getting domestic investors to diversify into other investment assets.
Barring local non-banking investors from buying or selling low-risk high-yield OMO bills crashed real returns on treasury bills below inflation and forced some investors back to the stock market.
This was not the singular cause, as investors took position in stocks that pay an attractive dividend (relative to share price) in anticipation of earnings reports, and oil price rose fuelled by a US-Iran tension.
Although many remained skeptical about the “cheerful” mood on the Lagos bourse, that finished 2019 almost 15 percent lower and extended a full-year decline to the second-year running, year’s return in 2020 soared almost steadily to more than 10 percent in January.
On January 24, CBN’s Monetary Policy Committee (MPC) raised the mandatory reserve of banks (Cash Reserve Requirement) to 27.5 percent of all their deposits in a bid to rein on inflation flirting with 12 percent levels.
The policy triggered an immediate sell-off on banking stocks as the market opened the following week.
Banking sector index lost 1.19 percent while the broader market dipped 0.26 percent. The sell-off persisted for eight-straight trading days paring year-to-date from as high as 10.38 percent to around 4.66 percent.
Investors were concerned that the CRR policy would further pressure the earnings of banks at a time lenders were struggling to meet the 65percent LDR target, minimum liquidity ratio 30.0percent, and facing shrinking income from interest income.
The downturn in the market also followed unimpressive earnings result announced by some firms in the period-many of which were consumer goods firms.
Weak corporate earnings which affect dividend payments also reminded the market that the macro-economic environment had not really changed from the previous year.
By February stocks hit a 3-week low as the outbreak of the coronavirus escalated and foreign investors sold off their stocks to retreat to havens.
That was not the only concern in February, the transaction cost for equity market participant had jumped following the coming into effect of 7.5 percent VAT rate as mandated under the new finance Act.
Only a few months back, there was zero VAT charge on NSE transactions.
The expiration of Order for exemption of VAT from all NSE transactions which was granted in 2014 by the Coordinating Minister of the Economy and the Honorable Minister of Finance meant Stockbrokers charged 5 percent VAT on all NSE transactions from July 25, 2019.
This rate was upped by 2.5 percent point more effective on February 1 2020, a move that made transactions more costly for investors.
Despite the turn of events, Nigerian stocks at 3.4 percent year-to-date return are still the best performing in Africa.
The outlook for the year doesn’t look bright but maturing bills which would coincide with the release of bank results in the coming weeks would lift the market temporarily.
For 2020, analysts say banking stocks will have to prove their resilience as recent policies by the CBN would weigh on their full-year interest and non-interest income. Investors are not taking the chance.
