The expected recovery of the equities market in the second half of the year has been further jeopardised, at least in the short-term, by the decision of JPMorgan to phase Nigeria out of its government bond index, according to a report by Meristem Research, a unit of Meristem Securities Limited.
The report, which reviewed the likely impact of the decision on Nigeria’s fixed income and equities markets as well as on the country’s foreign exchange, observed that the performance of the equities market in the year so far had been partly due to the lack of participation by foreign investors, who have alluded to the currency not being ‘fairly priced’.
As a result, it said it had been widely anticipated that there might be a further devaluation of the currency to align with general market perceptions, although the Central Bank of Nigeria had vehemently denied that it would pander to these expectations.
It said, “The anticipated resurgence of the equities market has been heavily premised on the expectations that the FX market would be liberalised, with most market participants predicting a year-end deadline for this due primarily to the deadline given by the managers of the JPMorgan index, shirking the adamant protestations of the apex authority to the contrary.
“Given recent happenings, we do not anticipate a sustained resurgence in the near-term unless the apex authority’s stoic stance re-instils confidence.”
In terms of the likely impact on the fixed income market, the Meristem Research team said it would likely lead to a decline in participation in Nigerian government bonds.
According to data compiled from JPMorgan, assets under management worth approximately $208.29bn tracks the three indices in which Nigeria is included, and of the total sum, $3.22bn tracks Nigerian bonds across three indices (GBI-EM Global Div., GBI-EM Div., GBI-EM Broad Div.) for a total weighting across all three of 6.77 per cent.
The report, which said that inability of investors to track the index would mean that the actual funds tracking Nigeria might be quite smaller, said, “Besides the impact of the sell-down across the benchmark 2, 7, and 10-year bonds, going forward participation will decline, which should consequently lead to a hike in yields.
“While we expected only a marginal rise (0.25 per cent) by year end given our expectations that the apex authority would not allow for this eventuality, given the CBN governor’s assurances of same, we have now revised our expectations and expect about a one per cent rise over the current levels.”
Analysts had said earlier in the year that an anticipated rally in oil prices half of the year, the conclusion of the general elections and the formation of a new government would eventually aid the recovery of the stock market. However, the delay in the formation of the government and failure of oil prices to rise as expected, among other negative economic news had left the equities market struggling.
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