Free-floating FX market jolts stocks

At the Nigerian Stock Exchange (NSE), equity investors are buying value stocks across banks and consumer goods with the hope that a new regime of freely traded interbank forex market will help foreign investors return to stocks after Nigeria ended era of currency peg which made the investors to flee.

On the euphoria of FX liberalisation, NSE ASI last week delivered strongest weekly return since April 2015, while the market capitalization recorded about N700billion gain.

After an early week profit-booking, stock investors turned bullish and strengthened the buying momentum across all major sectors which helped to lift the benchmark Index close to eight-month high.

“The announcement of the new FX policy framework has undoubtedly jolted the market with significant increase in demand from domestic retail and institutional investors who are looking to front-run the foreign portfolio investors (FPIs)”, said market analysts at Lagos-based United Capital.

They analysts said the surge in market turnover post the CBN announcement points to a rekindling of investor interest. “While we expect an increase in equity FPI in the near term, a full resurgence will likely be delayed until the CBN demonstrates an effective management of the new market framework,” they added.

Early this week (Monday), the Central Bank of Nigeria sold $3.5 billion on the forward market after it auctioned $532 million and intervened on the interbank market to clear backlog of hard currency orders worth around $4 billion.

“We expect the single market structure to improve domestic and foreign investors confidence as they will now be able to bring in and repatriate their capital at a market determined price (this we expect to have a positive impact on the capital market)”, said research analysts at Lagos-based, Capital Bancorp Plc .

Going by daily trading volume, the positive market breadth and broad based gains, analysts at Vetiva Capital Management Limited think market sentiment is strong enough to support further positive close in the sessions ahead, amid the potential for profit-taking at some point within the week.

As investors continue to take positions ahead of the anticipated return of foreign investors, research analysts at Meristem Securities noted that “short-term investors may begin to take profit on counters that have recorded significant price gains the past week.”

Research analysts at Dunn Loren Merrifield said in their equity brief that while the flexible FX policy is good for the local currency, “we are of the view that it is rather too early to sound the all-clear.”

According to the analysts, “We do not think this alone is enough to attract foreign investors to the capital market as there will be need to get a bit more clarity particularly long term impact on investment, more so, get a better handle on what the growth outlook looks like and also what the future path of the Naira looks like.”