BusinessDay Nigeria BusinessDay 18 Jun 2018 | Page 4

Monday 18 June 2018

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Stocks on path to historical sell-off before ...

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tion of -13.67 percent to close at 38,928.47 points on the last trading day of Thursday June 14th .

The slower performance in H1 2018 could be explained by profit taking by large institutional and retail investors who enjoyed a brilliant year in 2017 when equities rallied 42 percent .

A deep dive into historical market performance in the year prior to a general election in Nigeria show that investors are justified by pulling funds out of the market early in the first half of the year , preceding elections .

Typically what is usually seen in the equity market is that the first half of years preceding an election experience positive returns , whereas the second half ( H2 ) sees a negative return with the exception of the year 2006 whose performance rose higher from 9.26 percent in H1 to 26.12 percent in H2 .

Although , this performance could be because the year 2006 was a boom market for global equities as the bubble neared its peak levels .

In 2002 , the year preceding the re-election of President Olusegun Obasanjo , equities jumped 13.48 percent in H1 2002 but stock returns turned negative to -2.44 percent as investors sought to reduce their market exposure when the elections drew closer .

The strong H1 performance though ensured that the market closed the year on a positive note , with the broad measure of market performance the NSE all share index ( ASI ) rising 10.71 percent in 2002 . Still full year equity returns were significantly lower than it managed to achieve in 2001 , where the ASI rallied 35 percent .

In 2010 ( a year before the general elections of 2011 that brought President Goodluck Jonathan to power ), the equity markets had stellar returns of 21.88 percent in the first half of the year , but the bulls gave way for the bears in the second half of the year as H2 equity return was down -2.42 percent . Although , the stronger performance of the first half of the year ensured that the market enjoyed capital gains of up to 19 percent at the end of the year .

This was an improvement from the -34 percent market return in 2009 and marked the beginning of the stock cycle after the crash of 2008 . The period 2014 ( a year before the 2015 general elections ) started with a low stock return of 2.79 percent in the first half of the year as tensions built up toward the upcoming election and it only became worse as the equity market saw a large bearish market resulting in a negative return reported in the second half of the year of -8.42 percent and the NSE ASI reported a -16.1 percent drop by year end .

The year 2017 saw a great performance buoyed by bargain hunting and bullish market expectation . Stock prices rose sharply as investors raced to take advantage of the low market valuation .

The bullish run of last year has since faded in 2018 as investors ’ sentiments are now even more bearish than they were in 2016 as can be seen from the recent selloff in the equity market .

Robert Omotunde , the head of Research in Afrinvest opines that although he expects Half year , 2018 earnings to be decent , he does not think firm ’ s financial performance would significantly drive equity prices higher . This is because investors will be very cautious as the general elections draw closer .

“ Unless there is a significant policy shock , equity market will close the market positive but significantly lower than their performance in 2017 ,” Omotunde said . Afrinvest is also in the process of revising their yearend expectation of 18 percent market gains downwards .

If history repeats itself , the equity market may not the best for short term investors to be deploying funds today as equities typically perform poorly months before the general election in Nigeria . Analysts opine that the market selloff is largely caused by foreign investors who are gradually pulling their funds out of the local bourse as the election draws closer . Equities are highly volatile during periods of rising political uncertainty .

Foreign investors are repatriating profits out of the tensed political environment in Nigeria to invest in safer haven assets in USA where treasury yields are higher than they were a year ago .

The S & P 500 is currently up 3.94 percent while NASDAQ is up 10.94 percent year to date versus the NSE ASI performance of just 1.79 percent year to date .

“ Going into the rest of the year , the duo of policy normalisation in advanced markets and election uncertainties in Nigeria could potentially create foreign investors ’ aversion towards naira assets and , by extension , reduce capital importation into Nigeria .

Already in May , we saw some pressure at the I & E FX Window largely due to a slowdown in Foreign Portfolio Inflow with the equities market returning -7.7 % MoM while average yields in the fixed income market expanded 31bps MoM in May ,” ARM research analysts said in a June macro-economic update .

DAMILARE ASIMIYU , SOBECHUKWU EZE & EMEKA UCHEAGA

Nigeria ’ s currency swap deal with China which was touted as a way of strengthening the naira , may not be able to make much difference BusinessDay findings reveal .

The currency swap deal which is expected to improve trade relations between both countries , will make payments easier for Nigerian importers who spend up to N1.7 trillion importing from China annually , but the currency swap will on the average , only cover about 15 percent of importation costs over its three year period . Up to 85 percent will still require dollar payments .

“ We believe that the deal will only facilitate the ease of trade transaction between Nigeria and China which only accounts for less than 20 percent of Nigeria ’ s total annual imports . While the remaining 80 percent of our import needs will still be met using Dollars ,” said Robert Omotunde , head of research at Afrinvest Securities Limited .

Omotunde further explained that this currency swap deal will only ease the dollar pressure by three percent which is miniscule compared to what is needed to support the Naira .

“ Any swap deal should have

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Why Money Market funds are attracting ...

L-R : David Ladipo , managing director , Azura-Edo Power Plant ; Vice President Yemi Osinbajo , and Godwin Obaseki , governor of Edo State , during the Vice President ’ s visit to the power plant in Edo State , at the weekend .

Nigeria-China currency swap unlikely to improve value of naira

balanced mix of portfolio .

Currently , there are seventeen fund managers that have active money market funds in Nigeria , compared to nine fund managers in 2016 . The Money market funds currently make up 75.25 percent of assets under management ( AuM ) in the Nigerian mutual fund industry .

The rest comprise of equity based been focused on reducing the dollar demand for importing petroleum products which accounts for up to 30 percent of total importation in Nigeria . This ( type of ) deal would have been more beneficial to the Nigerian economy ,” he said .

Muda Yusuf , director general , Lagos Chamber of Commerce and Industry ( LCCI ), also told Business- Day that the currency swap will not “ make any significant impact on the value of the naira .”

“ The main advantage is that it will ease the payment process . Since we have a lot of imports from China , rather than receive your invoice in dollar , which is then converted to Yuan over there , you can now take invoice in yuan and pay directly ,” Muda explained .

He further elucidated that , “ the entire value of the swap which is about $ 2.5 billion for three years , does not even cover trade for ( only ) one year .”

His position corroborates Omotunde , who had also explained that Nigeria ’ trade relationship with China in 2017 was almost N2 trillion . With a currency swap deal worth N720 billion , the value of cash being swapped is not enough to cover up to 50 percent of trade with China in one calendar year .

If the Central Bank spreads the swap funds over the three years , BusinessDay estimates that only

funds which is 2.39 percent of the entire market , bond funds ( 1.73 %), fixed income funds ( 7.39 %), real estate funds ( 7.73 %), mixed funds ( 4.57 %), Ethical funds ( 0.93 %), and exchange traded funds which accounts for the remaining percentage of the market , according to Securities and Exchange Commission ( SEC ) data as at June 8th 2018 .

N240 billion will be available for importers annually . Earlier in May , the Central Bank of Nigeria ( CBN ) signed a currency swap agreement with the Peoples Bank of China ( PBOC ) to swap N720 billion for 15 billion Chinese Renminbi ( RMB ) in the first currency swap deal between both nations in modern history . In June , the CBN published the Regulations for Transactions with Authorised Dealers in Renminbi . This document outlined what is expected of commercial banks , merchant banks , other authorized dealers as well as importers who are all key players in the currency swap deal .

CBN claimed that signing the Naira Yuan swap deal would reduce excess dollar demand in Nigerian trading and investment activities . This deal according to CBN will increase the strength of the Naira by reducing the Dollar round tripping when Nigeria trades with China . However , these expectations from the CBN appear to be lofty , as the views of economic experts indicate not much change will be recorded , and perhaps , negligible if any .

Dolapo Ashiru , a Lagos based investment analyst also told BusinessDay by phone , that he believes the swap deal will be more favourable to China which is trying to reaffirm its currency as a global reserve currency .

On the reasons why money market funds have the highest percentage of the fixed income market , an Alpha Morgan investment Analyst said ; “ It attracts the highest investors because it is risk free , that is , the return will always be positive and it is short term .

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