Nigerian Equities Index Gains 50.03% in 2020 despite 41% Drop in Foreign Portfolio Inflows

0
Naira Gains against the USD at the Bureau De Change, Parallel (“black”) Markets Brandspurng
Afolabi Sotunde Illustration Naira

Freshly released report by the Nigerian Stock Exchange (NSE) on domestic and foreign portfolio participation in equities trading showed that total equities market transactions increased in FY 2020 compared to transactions done in the year 2019 as domestic institutional investors lifted local equities market performance despite foreign portfolio investors’ exit amid low fixed income yield and depreciating exchange rate.

Hence, the ratio of total domestic transactions to total foreign transactions tilted to 66:34 in the year under review, from 51:49 in FY 2019, given the 46.01% increase in total domestic transactions as compared with the 22.64% decline in total foreign portfolio transactions.

Nigerian Equities Index Gains 50.03% in 2020 despite 41% Drop in Foreign Portfolio Inflows Brandspurng

Specifically, total transactions on the nation’s bourse increased to N2.17 trillion in FY 2020 (from N1.93 trillion printed in FY 2019); of which total domestic transactions increased to N1.44 trillion (from N985.53 billion). However, FPI transactions decreased to N729.20 billion (from N942.55 billion).

A breakdown of the FPI transactions in FY 2020 showed that foreign portflio inflows contracted by 41.00% to N247.27 billion; also, the foreign portfolio outflows fell by 7.93% to N481.93 billion.

Notably, domestic institutional transactions spiked year on year by 61.39% to N820.14 billion in FY 2020 even as retail investors’ also increased their stake in the equities market in search for better returns (transactions from this group rose to N618.75 billion in the year under review from N477.34 billion in FY 2019).

Amid bargain hunting activities, particularly by the domestic institutional investors, the NSE All-Share Index (ASI) surged by 50.03% to 40,270.72 index points to close for the year 2020 (compared to a 14.60% decline to 26,842.07 index points in FY 2019).

Domestic investors patronised the equities market more, especially in the last quarter of 2020, given the ridiculously low fixed-income yields and the matured Open Market Operations (OMO) bills in Q4 2020 worth N3.44 trillion which was not reinvested in OMO space given CBN’s policy which prevented local asset managers and high net worth individuals from investing in the OMO space.

On the foreign scene, the West Texas Intermediate (WTI) crude price rebounded by 7.43% w-o-w to USD56.23 a barrel gave the 0.21% w-o-w decline in U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) to 475.66 million barrels as at January 29, 2021 (albeit, inventories rose by 9.57% y-o-y from 435.01 million barrels as at January 31, 2020).

Also, Brent crude and Nigeria’s crude grade (Bonny Light) increased by 7.15% and 6.16% to USD59.04 and USD57.76 per barrel respectively as at February 4, 2021, as OPEC+ maintained its production cut policy.

The U.S crude oil benchmark rallied despite the 0.54% w-o-w fall in US crude oil input to refineries to 14.64 mb/d as at January 29, 2021 (also, It declined y-o-y by 8.33% from 15.97 mb/d as at January 31, 2020).

We expect the equities market rally witnessed in January to mellow in the months of February and March, despite the anticipated dividend payment announcements by corporates in the months, as share prices have risen to levels where the dividend yields appear to have been stretched.

This is more so as the fixed income yields are beginning to rise. Although rates across short term instruments would still be low in 2021, we expect to see a certain level of upward movement from the record lows traded at in 2020 given the sustained hikes in stop rates in recent auctions which may be a sign that CBN is pressured to marginally increase rate in 2021 in order to attract foreign funds, stabilize exchange rates and reduce the negative real returns suffered by investors amid rising inflation rate.

Hence, we advise investors in the stock market to trade cautiously or wait for the opportunity to “buy the dip” (earn attractive dividend yield and achieve capital appreciation) as share prices decline.