Declining macro environment, currency uncertainty, inhibiting investor confidence in equities market

The lack of clarity surrounding Nigeria’s currency is limiting foreign investors’ confidence in entering into, and trading in the Nigerian equity markets. So also is the lack of economic direction from the fiscal side.

According to analysts, the lack of economic direction manifested in the non-appointment of economic managers is fostering the slump in the economy, and ensuring that the economy remains a victim of global economic headwinds, whilst also delaying a possible economic resurgence.

Domestic companies are continuing to operate in tough markets, leading to a continued dip in profitability.

“With the deterioration in the macro situation in Nigeria, the dwindling disposable income of the consumer, and the anticipated devaluation of the naira, we believe the operating environment will remain tough”, said emerging market focused investment firm RenCap in its recent analyst note.

Due to the declining macro environment in the country, and a lack of clarity in the currency, RenCap is preferring Consumer companies listed in Egypt and Pakistan, rather than those listed in Nigeria, as the macro environment in those countries are structurally stronger and their consumer companies continue to exhibit growth, while Nigerian consumer countries continue exhibiting declines.

Analysts say that until things become clearer, and a definite direction is seen, foreign investors could continue to stay away from Africa’s biggest economy. Also, currency-trading restrictions would have to be done away with.

“Investors don’t like uncertainty around the environment in which they are going to operate,” Chief Executive Officer of the Nigerian Stock Exchange Oscar Onyema said in an interview in London on Thursday, as reported by international media outfit Bloomberg. “We believe that the government is aware because it’s hearing it from multiple sources. We have made similar statements.”

The Apex banking regulator has supported the currency with its reserves, and limited its decline to 7.6 percent against the dollar using measures such as restricting access to forex. But the attention is now on Nigeria after some other emerging markets like Kazakhstan and Vietnam have devalued their exchange rate. More than three months after taking office, President Muhammadu Buhari has yet to appoint a cabinet or give details about his economic plan.

The Nigerian Stock Exchange All-Share Index has dropped 15 percent this year. The currency, economic policy uncertainty and companies’ results falling short of expectations are the three main concerns of investors, Onyema said.

“It doesn’t matter where the exchange rate is as long as people are confident that the currency is going to be stable,” Onyema said. “That is the feedback that we’re getting from investors.”

Beyond the energy industry, banks have faced “extremely tough operating conditions,” Onyema said. “If you look at other sectors, oil and gas, and fast-moving consumer goods, the corporates are just beginning to turn around.”

Nigeria’s banks will see smaller profit and asset quality, with industry non-performing loans likely to rise above an informal central bank cap of 5 percent, Fitch Ratings said last week. TheNigeria Stock Exchange Banking 10 Index has declined 14 percent this year.

While domestic investors account for 75 percent of stock ownership, 60 percent of trading activity is done by foreigners, Onyema said at the Nigeria Capital Markets Forum in London.

“The central bank has a job to make sure there’s confidence in the currency and they’re doing their best under the circumstances,” said Onyema. But “investors must believe in what you’re doing — it takes two to tango.”

One fiscal measure Onyema is looking for from the new administration is tax breaks for companies choosing to list and higher taxes for those deciding not to. Listed companies tend to pay around 65 percent more of their earnings in taxes as they’re held to higher standards of disclosure, he said.

A bill in parliament that would compel companies to list should be “changed dramatically so you give incentives” instead, he said.

Edozie Ifebi

Source : BusinessDay

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