Local Institutional Investors Buy Equities Market ahead of Interim Dividend Payment

Market And Economic Update: Weekly Market Report
Market And Economic Update: Weekly Market Report

In the just concluded week, a report released by the Nigerian Stock Exchange (NSE) on domestic and foreign portfolio participation in equities trading revealed that total equities market transactions increased in June 2021 compared to the volume of transactions executed in May 2021 as domestic institutional investors gradually took position amid releases of corporates’ half-year financial results which have been generally positive and the prospect for half-year dividend payments.

Investors in the equities market are optimistic that Tier-1 banks would pay interim dividends as usual.

Notably, the relative downward trend in interest rates, especially for 364-day treasury bills also contributed to the increased activity witnessed on the domestic bourse month-on-month (m-o-m) as domestic institutional investors and foreign portfolio investors sought for safe haven.

Stock picks
Photo by Mark Finn

The stop rate for the 364-day T-bill fell to 9.15% in June from 9.75% at the end of May 2021; as at the last auction on July 28, 2021, the stop rate stood at 8.20%. Accordingly, domestic institutional investors transacted the most, followed by retail investors; while foreign portfolio investors’ contribution was the least but with a larger increase.

Hence, the ratio of total domestic transactions to total foreign transactions tilted lower to 77:23 in the month under review, from 79:20 in May 2021 – total domestic transactions rose marginally by 0.59% while total foreign portfolio transactions increased by 15.43%.

Specifically, total transactions on the NGX rose to N100.77 billion in June 2021 (from N97.19 billion printed in May 2021); of which total domestic transactions increased month-on-month (m-o-m) to N77.35 billion (from N76.90 billion). The FPI transactions rose to N23.42 billion in June (from N20.29 billion printed in May).

A further breakdown of the FPI transactions in June 2021 showed that foreign portfolio inflows pumped to N13.92 billion (from 13.01 billion); albeit, foreign portfolio outflows rose to N9.50 billion in June from N7.28 billion in May.

On the part of local investors, the increased stake in the equities market was amid sell-off by retail investors – their outflow transactions were N20.51 billion, higher than the N15.55 billion worth of inflows. Hence total retail transactions rose by 9.47% to N36.06 billion.

On the flip side, the domestic institutional investors’ outflow transactions were N20.20 billion, lower than the N21.09 billion worth of inflows from them. Thus, total local institutional transactions fell m-o-m by 6.07% to N41.29 billion in June 2021.

Given the lukewarm approach of the retail investors, the NSE All-Share Index (ASI) fell by 1.38% to 37,907.28 index points for the month of June 2021. In another development, Nigeria may be eased of its depreciating Naira value against other currencies, at least in the short term, as International Monetary Fund (IMF) approved a general allocation of Special Drawing Rights (SDRs) equivalent to USD650 billion – out of which Nigeria gets USD3.35 billion – to boost global liquidity.

As the dynamics of the country’s exchange rate begins to trend in line with CBN objective – exchange of Naira to US dollar eased to N508/USD from the high of N525/USD when BDCs were stopped from accessing direct funding from the apex bank – we should see interest rates fall further. Also, with the declining inflation rate, CBN would have ample opportunity, in the short to medium term, to achieve its objective of moderating rates to stimulate real sector growth.

Meanwhile, Cowry Research expects the anticipated foreign currency inflows from the IMF’s SDRs initiative and the proposed Eurobond sales to further increase CBN’s capacity to keep the exchange rate in check even as currency speculators supply the market amid the above mentioned fresh USD liquidity realities. Hence, we feel the equities market may breathe better as we approach the last quarter in 2021.