JP Morgan: Fear grips investors over Nigeria’s expulsion

Economic developments in the past week, including the plan by the United States lender JP Morgan to phase Nigeria out of its government bond index, are expected to leave investors cautious in the coming week.

The delay by President Muhammadu Buhari to name his cabinet, a development which analysts said had left investors without a clear picture of the direction economic policies would take during his tenure, had already weakened investors’ confidence.

According to analysts, the announcement by JP Morgan on Tuesday has further weakened confidence in the capital market with investors losing N311bn on Wednesday as stocks plunged by 2.89 per cent.

Although the Nigerian Stock Exchange All-Share Index and the market capitalisation of the listed equities rose by 0.6 per cent during the week, analysts insist investor confidence has taken a hit.

“Given the recent news flows and headwinds prevalent in the Nigerian financial space currently, we do not anticipate a positive rally in the market in the short run as investors remain sceptical,” analysts at Meristem Securities Limited said in a report on Friday.

Some analysts are, however, hopeful that due to the low prices of stocks, that bargain hunting by some other investors could result in gains.

“With the NSE ASI closing the week at (+91 basis points, +0.6 per cent week-on-week), we expect gains to filter into next week’s trading session following the intense sell-offs in the past week particularly in the Financial Services sector,” analysts at Vetiva Capital Management Limited said.

“Investors are likely to take advantage of attractive valuation levels hence the anticipation of a modest uptick on the exchange floor.”

Generally, analysts believe investors would remain cautious in the coming weeks, pending positive economic news.

In announcing its decision to remove Nigeria from its emerging markets government bond index, which has around $210bn in assets under management benchmarked to it, JP Morgan cited liquidity challenges in the Nigeria’s currency market as a basis for the move.

“Foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way FX market and limited transparency. As a result, Nigeria will be removed from each of the six GBI-EM indices starting September 30,” the bank had said in a note.

The CBN, however, faulted the move, insisting that it had taken several steps to address liquidity issues in the currency market and ensured that it met all forex requirements.

It added, “Despite these positive outcomes, the JP Morgan would prefer that we remove this rule; even though it is obvious that doing so would lead to an indeterminate depreciation of the naira. With dwindling oil prices, we believe that an order-based two-way market best serves Nigeria’s interest at the moment.

“While we would continue to ensure that there is liquidity and transparency in the market, we would like to note that the market for FGN Bonds remains strong and active due primarily to the strength and diversity of the domestic investor base”.

Analysts, however, said the CBN’s response was not strong enough to boost confidence.

The Chief Executive Officer, Highcap Securities Limited, Mr. David Adonri, who said the market would eventually adjust to the news, said regardless of what the CBN had said, the action of JP Morgan had hit confidence, especially among foreign investors.

“It will weaken confidence in the market in the interim until the Nigerian authorities, both fiscal and monetary authorities, take measures that can strengthen the economy and allay the fears of investors,” he said.

Adonri explained that although the monetary authorities had already made their intention known in reducing demand for foreign exchange, the fiscal authorities had not come up with “far-reaching fiscal policies that can strengthen the economy” and allay the fears of investors that the exchange controls would prevent the free flow of capital in and out of the economy.

The Head, Investment Research, Afrinvest West Africa, Mr. Ayodeji Ebo, who agreed that investor confidence had been weakened by the development, said there was the need for further clarity about how the CBN planned to address liquidity challenges.

“If CBN is claiming that it has been able to meet all demands, we feel that it needs to make some further clarity,” he said.

Copyright PUNCH.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from PUNCH.


Source : Punch

Tags: No tags

Comments are closed.