By Chinenye Anuforo and Chinwendu Obienyi
Loss of confidence in the implementation of announced free floating foreign exchange regime; weak corporate performance and the economy engulfed a recession have been identified as the reasons the Nigerian Stock Exchange (NSE) witnessed the lowest levels of foreign portfolio and domestic trading activity in 2016.
According to statistics obtained from the nation’s bourse, after peaking at 31,071.25 points in June 2016, an increase of 8.48 per cent over the 2015 closing value, the NSE All Share Index (NSE ASI) retreated to negative territory as total foreign inflow dropped 45 per cent between June (N42.46 billion) and July (N23.43 billion) due to the reasons above.
The report stated that, “accordingly, the exchange witnessed the lowest levels of foreign portfolio and domestic trading activity post the global financial crisis, with a Year-On-Year (YOY) decline of 69.79 per cent and 56.79 per cent, respectively. This trend is consistent with the inverse correlation observed between the value traded on the NSE’s equity market and the spread between the parallel and interbank forex market rates, suggesting that both domestic and foreign investors seek stability in monetary policy.”
In analysing the performance of the market last year in its 2016 Market Recap and Outlook for 2017 last week in Lagos, the Chief Executive Officer, NSE, Mr. Oscar Onyema, explained that in addition to sluggish performance in secondary markets, the primary market activity was nonexistent as there were no Initial Public Offerings (IPOs) for the year, although there was one new company listed by introduction in the period.
The NSE Industrial Index recorded the steepest drop of the year at 26.37 per cent, a result of severe difficulties faced by companies in accessing capital to import raw materials. In the Exchange Traded Funds (ETFs) market, tracking to this methodology, the Vetiva Industrial ETF recorded the largest price decline in 2016 of 20.51 per cent when compared to ETFs in other sectors. On the flip side, the NSE’s NewGold ETF saw a sharp increase as its value climbed 94.73 per cent during the year, a clear indication of investor’s flight to safety sentiments.
Generally, there was 19.41 per cent increase in ETF AUM listed on the exchange from 2015 to 2016, primarily due to the listing of the Vetiva S&P Nigerian Sovereign Bond ETF.
Further indication of the equity market’s link to economic dynamics is reflected in the drop in NSE Oil/Gas Index, which declined 12.31 per cent, mimicking the 22.01 per cent decline in real GDP growth of the oil sector by Q3’16 driven by output and distribution complications. Real Estate Investment Trusts (REITs) declined by 49.48 per cent and 47.10 per cent in value and volume traded, respectively, reflecting the macro-economic impact of the real estate sector, which declined by 7.37 per cent in terms of GDP.
Inflation had a converse-effect on activity in the fixed income market during the year. Inflation spiked above 18 per cent by Q4’16, driven by rising prices of imports and structural deficiencies in power, transportation and production. The high rate of inflation forced the CBN to raise interest rates to 14 per cent in July 2016.
Consequently, the value of bonds in the market depreciated, increasing investors’ appetite for portfolio diversification via interest rate products selling at discounts. This resulted in a 137 per cent increase in the value of bonds traded on the NSE in 2016, admittedly from a low base. “We also saw a 31.17 per cent improvement in bond issuance during the year.”
Onyema, however, said that the Nigerian capital market did experience some resilience by year-end as the NSE Premium Board Index ended 2016 in positive territory, advancing 6.98 per cent, while the NSE Banking Index inched up by 2.17 per cent. Furthermore, after declining by 21.60 per cent to a low of 22,456.32 points in Q1’16, the NSE ASI rebounded by 19.68 per cent from its January low to close the year by 6.17 per cent mirroring the 6.12 per cent decline in the equity market capitalisation.
On NSE strategy execution in 2016, Onyema noted that building on the successes achieved in 2015, the NSE remained steadfast in the execution of its strategy despite the challenging environment. “We also ramped up our engagement with government at various levels to advocate for market friendly policies and initiatives that can drive economic recovery.”
Speaking on the capital market outlook for the year, he said the market will have to do a better job at promoting its unique value proposition to both global and domestic investors. “Monetary policy will continue to play a vital role in determining activity in the market.
With forecasts for inflation expected to moderate due to the base effect, we believe that all things being equal, monetary authorities will have more flexibility with respect to interest rates and forex regime. Hence, good coordination between fiscal and monetary policy should result in resolution of aforementioned structural deficiencies and drive economic growth.”
He added: “We expect investors to continue to keep a close eye on the divergence between the interbank forex rate and other exchange rates in the country.
Accordingly, a convergence of forex rates in the country and the performance of listed corporates will determine the level of market activity in the short term.”