Moderate Downturn In Capital Market Caused By Investment Outflow – CBN
The moderate downturn being witnessed in the Nigerian equities market is due to continued outflow of portfolio capital, the Central Bank of Nigeria (CBN) has said.
The apex bank made the assertion in a communique, arising from its two-day Monetary Policy Committee (MPC) meeting held early this week.
“The MPC noted the moderate downturn in the equities market, attributing it to a continued outflow of portfolio capital as investors re-assign their portfolios to more attractive US (United States) dollar denominated fixed income securities,” CBN stated.
Calling on the federal government to improve the ease of doing business in the country, on account that foreign investors have continued to flee from the country because of an unfriendly investment environment, CBN said, this is “to retain the current patronage of foreign investors through sustained investor confidence in the Nigerian economy.”
The apex bank, in a bid to tighten its monetary policy stance to move against inflation, had raised interest rates for three consecutive times since May this year.
Nigeria is currently experiencing an economic downturn with inflation hitting over 20 per cent mark in August, and representing the highest figure ever recorded since 2005.
InsideBusiness can recall that in May, the bank raised the interest rate to 13 per cent from 11.5 per cent for the first time in two years, pushed it to 14 per cent in July, and then aggressively to 15.5 per cent in September.
Data from the Nigerian Exchange Limited (NGX) showed that the overall market capitalisation shed N2.04 billion to N26.88 trillion between May 31 and August 31 2022. Analysts have argued that the increasing rate of inflation rate was a major hitch in the domestic bourse, even as the prospects of Nigeria’s economy is eroding the confidence for foreign investors to stay.
To that end, data from the NGX revealed that the total domestic and foreign portfolio investment (FPI) transacted between May and August tumbled by 79.59 per cent to N123.97 billion as at August 31, from N607.45 as at May 31.
When compared to the corresponding period in 2021, aggregate foreign investment outflow from the Nigeria stock market rose by 66.69 per cent to N65.76 billion (between May-August 2022) from N39.45 billion (between May-August 2021).
Further analysis of the total transactions executed during the review period (May 31 to August 31) revealed that total foreign transactions at the floor of the NGX declined by 37.73 per cent from N45.30 billion in May to N28.21 billion in August.
An investment and portfolio analyst, Abel Ezekiel, told our correspondent that CBN’s aggressive move against inflation was already catching a cold on investment portfolios as the interest rate hike could have a devastating effect on the equity market.
“We are currently feeling or seeing the effect, the NGXASI has gone below the 50,000 basis points threshold attained last May, 2022. This is because, equity being a very risky asset will receive less patronage in favour of less or no risk asset class such as bond.
Ezekiel stressed further that CBN’s interest rate hike has already begun its impact on the market. He said, “A lot of corporate or high net-worth investors will naturally move their funds away from high risky assets to a less risky or no risk asset but offer higher return which is the best form of a good investment decision to take in the circumstance.”
According to him, brokers are already expressing a negative or pensive mood of low “buy order, low income from trading activities and surely a period of pressure for better performance from management of most broking firms which will be very challenging as most portfolio investors will want rebalancing and investment.”
For the fixed income market activities, certainly, most bondholders whose rate has dropped would want to sell to seek for fresh ones with higher return.
“This will mean massive sales in existing instruments for an opportunity to lock into a new bond with higher coupon is certainly envisaged and such will pervade the bond market so increase in activities is currently being witnessed in that segment of the market,” Ezekiel added.
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