Resumption of FX Sales Could Renew Foreign Sell-Offs in Equity Market

Resumption of FX Sales Could Renew Foreign Sell-Offs in Equity Market

Resumption of foreign exchange sales by the Central Bank of Nigeria could renew foreign sell offs in the equity market, analysts have said.

The scarcity of foreign exchange occasioned by lower foreign investment receipts and others inflows have reduced accretion into the external reserves.

A number of foreign investors have been effectively locked down in the economy as they are unable to repatriate funds abroad.

Locally, Cardinalstone analysts said market performance was affected by the differing sentiments of domestic (institutional and retail) investors and foreign portfolio managers in the first half of 2020.

On the former, analysts said CBN’s restriction of local non-bank financial institutions and individuals from participating in OMO programs resulted in a significant increase in idle liquidity, some of which eventually flowed to equities with the allure of fixed income market reduced by expansionary measures of the apex bank.

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While the lack of viable options forced some domestic investors into stocks, foreign interest in Nigeria’s market waned on the back of credit ratings worries, oil price weakness, currency concerns, and potential earnings tail off.

Despite some recent resurgence, Cardinalstone said Nigeria’s stock market could close the year in the red if deployed stimulatory measures fail to compensate for macro setbacks.

“By our estimates, the cumulative fiscal and monetary response to tackling the ongoing coronavirus-induced economic slowdown in Nigeria amounts to only 3.0% of GDP”, the firm stated.

Analysts explained that this stimulus pales in comparison to that of South Africa (10.0%) and Brazil (6.5%) even though both countries were not as exposed to the equally dire strait of falling commodity prices.

The grimmer outlook for Nigeria reflects the additional strain that weaker oil economics can impose on its mono-product economy, analysts said.

“Besides, there are genuine concerns that a full resumption of CBN dollar sales to foreign portfolio investors could see renewed foreign selloffs overrun the bullish strides from domestic participants”, analysts explained.

Cardinalstone said: “In a word, if you take away the few opportunities for tactical positioning, the equities market may struggle to attract significant buying interest for the rest of 2020”.

Meanwhile, analysts explained that it is difficult to accurately predict the depth or duration of the current economic downturn due to the high volatility of macro variables.

The investment firm tasks investors to brace for near-term declines in stock markets as Q2’20 company scorecards are released.

Analysts said in this environment, they expect investors to gravitate towards stocks with track records of high profitability, low financial leverage, and less margin volatility.

“Such counters could provide critical buffers for portfolios in the current year”, analysts at Cardinalstone remarked.

Specifically, the firm stated that retained earnings from prior successful years could support current dividend payments, which could, in turn, augment portfolio returns during market downturns.

“Within our coverage universe, companies with high profitability, low operating margin volatility, and consistent dividend payout include GTB, ZENITH, UBA, DANGCEM, and NESTLE”, Cardinalstone revealed.

It stated that some of these stocks also satisfy the need for higher yield and have more stable risk profiles than regular stocks.

“Proactive positioning in stocks that are targets of restructurings, acquisitions, and other corporate actions could also improve equity returns within portfolios”, analysts added.

The firm said passive investors who seek to replicate the Nigerian Stock Exchange may experience negative returns in 2020.

Even though valuation metrics (such as price to earnings ratio) suggest that current dynamics present attractive entry opportunities for medium-to-long-term investors.

“All in, while near term-risks of weaker oil price, macros, and corporate earnings are somewhat obvious, the viral spread could have a relatively longer-term impact on consumer spending, dividend payments, share buybacks, and other corporate actions.

“These hazier potential impacts could be critical to equities performance in the coming year”, Cardinalstone explained.

Resumption of FX Sales Could Renew Foreign Sell-Offs in Equity Market