Equities market up N324bn as external reserves dip $2.27bn in 7 months

MOTOLANI OSENI

The Nigerian Exchange Limited (NGX) equities market recorded a positive performance in July as investors gained N324 billion, this is even as the nation’s foreign reserves declined by $2.27billion in seven months, from $35,647,798,621 stood on 4th January and $33,380,681,076 maintained as of July 29, 2021.

Specifically, the market capitalisation, which measures the value of all equities, rose from N19.760 trillion on June 30, 2021, to N20.084 trillion on July 30, 2021.

Similarly, the NGX All-Share Index rose by 1.69 per cent from 37,898.56 basis points on June 30, 2021, to 38,547.08 basis points on July 30, 2021.

Reviewing the market performance so far in the year showed that the stock market, which kicked off the year with some of the bullish moment from 2020, gaining 5.3 per cent in January 2021, subsequently reversed as various drags, particularly the yield reversal, weighed on sentiments.

Accordingly, the equity market shed 5.9 per cent in H1, 2021. Meanwhile, the bleeding eased as the market ended July, which is the beginning of the second half of the year, with a growth of 1.69 per cent.

Market operators linked the positive performance to bargaining hunting and positioning ahead of corporate results for the half-year ended June 30, 2021. While some investors were trading cautiously waiting for the corporate results, some were taking advantage of the low prices to enter the market, hence the gain recorded in the month under review.

Meanwhile, in line with the uptrend in the market, the sectorial indices closed on the positive side in the period under review. The Oil and Gas Index gained by 20.40 per cent. NGX Premium Board index followed with a gain of 6.58 per cent while NGX Banking index rose by 4.06 per cent during the month.

Others are NGX Industrial Goods, Pension, NGX 30 and Lotus II recorded 4.64 per cent, 3.12 per cent, 2.78 per cent and 2.10 per cent in the month of July. On the other side, the NGX Insurance index declined the most, falling 2.98 per cent, while NGX Consumer Goods went down by 0.54 per cent in July.

Analyst at PAC Holdings, Mr Wole Adeyeye said investors are engaging in profit-taking overprice appreciation of stocks recorded last year.

He maintained that the growth in July 2021 was driven by an impressive half-year results of listed banks, others.

According to him, the market gained in July was driven by interim dividend payout to shareholders and impressive corporate earnings.

“Most of the stocks in July were undervalued and investors take a position in those stocks and it impacted the All-Share Index. Investors positioned themselves for dividend payout by fundamentals and it also drives the stock market in July.”

An independent analysts at Tradelines Limited, Mr Tunde Jeriogbe said that. The stock market closed positive in July as a result of investors positioning for interim dividends.

According to him, given that June and August are associated with the declaration of interim dividends, we envisage that investors will flock into stocks with attractive dividend yields as we inch closer to the half-year earnings season. We believe ‘early bird’ investors will outperform the ‘late comers’ in these periods since they are more likely to reap the benefits of a ‘divided rush’.

Analysts at United Capital Plc stated that “Following evaluation of the several factors expected to shape the financial markets in H2, 2021, we harmonise these factors and provide our expectations for the equities market and the yield environment as well as our preferred strategies.

“We expect to see periods of oscillation in the yield environment, albeit with an overall downward bias. Our expectation is built on three key factors; improved system liquidity via instrument maturities, deployment of financial repressive tactics by sovereign debt managers and status quo stance on monetary policy.

“That said, despite our expectation of moderation in fixed income yields, we do not see a rate crash similar to that of 2020. As a result, we expect demand for fixed income instruments to remain upbeat particularly among domestic investors, limiting prospects for improved flows to risk assets like equities.”

Meanwhile, data obtained from the Central Bank of Nigeria (CBN), showed that the gross reserves have dropped to approximately $33.38 billion on July 29 against the $35.65 billion balance as of January 4, 2021.

Considering the month-on-month performance of the reserves, the data indicated that the reserves in July gained $101.4million from $33.28billion to $33.38billion as of July 2021, attributable to steady increase in global oil prices as Foreign Direct Investment into the country suffer dropped in the second quarter of 2021.

According to the Organization of Petroleum Exporting Countries (OPEC), the price of 13 crudes reached $70 per barrel.

The dwindling foreign reserves, analysts warned, could leave the country’s battled economic outlook worse off as the confidence of foreign investors is partly influenced by the size of the reserve.

An investment expert and economist, David Adonri warned that Nigeria, like every other import-dependent country, needed a supportive foreign reserve to meet its needs.

“The value of the naira and foreign investors’ confidence in the economy is tied to the level of foreign reserve available. As it depletes, foreign investors’ confidence in the economy is being eroded.

“The main source of forex inflow is earnings from crude oil export held by CBN in foreign reserves supported by diaspora remittances and export proceeds. As the major provider of forex in the economy, CBN can determine the value of the naira and influence imports. With the depletion of the foreign reserve, that power is diminished considerably.”

A member of the CBN’s Monetary Policy Committee (MPC), Folashodun Shonubi had expressed that, “Despite being challenged by low foreign exchange revenue from exports and reduced capital flows, the marginal overall balance of payments surplus and generally adequate foreign reserves level provided some respite in the external sector.

“Federal Government retained revenue increased slightly in April 2021, while expenditure reduced, due to decline in mainly personnel cost. Though fiscal deficit contracted, it remained above the budget benchmark.”

The MPC thus urged the Bank to maintain its collaboration with the fiscal authority to improve the investment climate towards attracting sustainable Foreign Direct Investment (FDI).

Another member of the MPC, Adenikinju Festus in his personal statement, stated that “ Exchange rate speculations are fueling depreciation of the naira in all the exchange rate windows. External reserves declined from $34.29 billion in April 2021 to $34.13 billion in May 2021.

“We also continue to experience dual deficits in the BOP. There is a need for a major boost to Government revenue to reduce the rising fiscal deficit and narrowing of fiscal space.

“The subsidy on petroleum products and the poor performance of refineries are issues that need immediate attention. The economy also needs a strong buffer to mitigate external volatility.

“As a country, our excessive dependence on oil for revenue and foreign exchange sustenance is no longer tenable in the medium and long term.”