The Central Bank of Nigeria’s ban placed on individuals from trading in the Open Market Operations has boosted activities in the Money market, USD funds and the equity market. This was disclosed by EFG Hermes in a report released recently.
In the report, the firm stated that local non-banks like Pension Fund Administrators (PFAs), individuals, companies, Non-Bank Financial Intermediaries and state governments owned N7.5 trillion of the CBN bills as at September 2019 (before the CBN decision), which is equivalent to 42% of the total.
According to the Investment Bank, PFAs owned N2.3 trillion in CBN bills at the end of September, leaving N5.1 trillion in the hands of other local investors to be reinvested as these CBN bills mature.
It stated, “Some of this money will go into equities, but mutual fund data for the fourth quarter of 2019 show a strong preference for fixed income in Naira and Dollar over equities. Money market funds alone saw inflows of N160 billion in the three months after the CBN decision on OMOs.
“We note that there were also significant flows into bond mutual funds, many of which are entirely or partly focused on fard currency paper-like Eurobonds. We think some locals that had been blocked from the primary OMO market from late October 2019 actually bought from foreigners in late 2019.”
The report also stated that the equity market benefited from the ban, as the market rallied strongly, with blue chips outperforming, and the all-share index up by 9.2% between November and January.
Analysts in EFG Hermes said that the equities rally might also have been driven by seasonal hunt for yields by investors as blue chips usually won’t pay final dividends until March/April.
Chief Research Analyst, EFG Hermes, Simon Kitchen, explained that the surge in the equities market at that time coincided with the seasonal rally in Nigerian stocks ahead of the dividend season, and it is expected that the market will continue to consolidate as dividends are paid in March-April this year.
“We have looked at the performance of high-yielding stocks in the run-up to final dividend distributions over the past 10 years. Expectedly, we see a sustained rally in the three months before dividends are paid, though with periods of profit-taking; more surprisingly, stocks continue to perform in the weeks after the ex-dividend date, perhaps as dividends are reinvested,” Kitchen said.
Meanwhile, according to the Nigerian Stock Exchange data, buying on The Exchange by local institutions in the last quarter of 2019 totalled N55.6 billion and data from PENCOM suggests that much of the buying was done by local pension funds with an estimated net buying of N50 billion between October and November 2019, increasing their equity allocations to 5.4% in November 2019.
Where is the CBN going with its policy?
Continuous depletion of the reserves and the falling opportunity cost of holding dollars have increased the chances of devaluing the naira in 2020. However, analysts’ view is that the CBN will not voluntarily allow a major (+5%) move until there is no alternative.
The government’s stubborn stance on maintaining a ‘command economy’ policy with credit being directed into favored sectors and the exchange rate being defended gives little hope for a sustained bullish run.
In the meantime, weak fundamentals will mean that the authorities need to work hard to attract and retain foreign portfolio investment.