Two Months on, Flexible FX Policy Fails to Lift Equities Market

The Nigerian equities market has recorded negative performance two months after the implementation of a flexible foreign exchange (FX) policy by the Central Bank of Nigeria (CBN). This is contrary to expectations that the policy will spur inflow of foreign portfolio and domestic investors and lift the market.

The market has shed N151billion in market capitalisation between June 15 when the policy was announced and last Friday. One of the reasons cited for low portfolio inflow into the market was uncertainty about the nation’s FX policy and the CBN’s capital controls.

Available data from the NSE revealed that Foreign Portfolio Investment (FPI) accounted for 40.43 per cent (N189.45 billion) of total transactions on the nation’s bourse in the first five months of the year, down from 57.04 per cent (N519.34 billion) during the same period the previous year.

So when the CBN announced a flexible policy, it was highly expected that the market would rebound on positive reactions to the policy by foreign and domestic investors.

Although reactions were positive initially, leading to a rise of 1.12 per cent in the Nigerian Stock Exchange (NSE) All-Share Index (ASI) from June 20 to 30, it began a down ward trend since July to last Friday. In all, the market has declined by N151 billion in capitalisation, falling from N9.579 trillion pre-flexible policy to N9.428 trillion last Friday. The ASI has fallen by 1.6 per cent, from 27,891.96 to 27,450.91.

A market analysts, Jude Fejokwu said the market had a transient boost during the last nine trading days of June before returning to a persistent decline after global markets recovered post-Brexit.

Looking at the impact of the policy on the market, analysts at Cordros Capital Limited (CCL), said although the CBN may have responded to the agitations of the FPIs with its decision to lift restrictions on the local currency, early signs since the kick-off date show that the programme has had no immediate impact on FPI activities in equities.

“FPI consensus is that the Naira is not sufficiently devalued at N282-285/US$. Overlaying this on reports from the grapevine that the liquidity of the local currency exchange rate is still (indirectly) largely under the control of the apex bank (judging by the relative stability of the NGN) risks Nigeria from being eliminated from the MSCI Frontier Market Index at the next index review in September and further dampens expectations of expansionary foreign investment flows into Nigeria’s risky assets in the near term,” they said.

The hike in the Monetary Policy Rate to 14 per cent also had a negative impact on the equities market. According to analysts, they expect attractive yields in the fixed income market (as a result of the hike in MPR) to shift investors focus from equities.

“Also, lower oil price and lack of FX liquidity are expected to continue to dampen economic and corporate outlook. We believe that all these factors will weigh on investors’ confidence in the equities market,” they added.