Liquidity-pull from domestic and foreign investors has caused the Nigerian equities market to erode about N427 billion from its recent gains.
Ahead of tomorrow’s (Tuesday) implementation of 75 percent Cash Reserve Ratio (CRR), Nigerian banks pulled funds from the equities market to hedge themselves from resultant shocks.
“Banks are suffering from the effect of implementation of 75 percent CRR. Between N800billion and N1trillion would be pulled out from the banks by the Central Bank of Nigeria (CBN). It is taking a hit on the stock market,” said Femi Ademola, head, research & intelligence, BGL plc.
Ademola further observed that the stock market has been worse-off recently because contrary to market expectations no major listed companies had released their financial, save for Forte Oil.
In addition, analysts told BusinessDay that the pull back by the US Federal Reserve on its Quantitative Easing (QE) policy is already reverberating around the world, especially in emerging markets, and has sent stock markets plummeting.
The U.S Federal Reserve’s monthly bond purchase which was reduced to $65 billion, as well as its recent bond issue with 1.5 percent yield, caused most US foreign investors to look within their market, at the expense of emerging markets like Nigeria.
Foreign investors are the biggest buyers of Nigerian equities and at the last count, they made up over 50 percent of equities deals at the Nigerian Stock Exchange.
With this development at the US Fed, Ademola is optimistic that the market will stabilise this week, as banks recover from the CRR related shock. He further observed that “across the emerging markets, most of them are in the red.”
Illiquidity is also trailing the stock market as recent increases in bond yields prompt many investors to sell down their holdings on equities in order to position in the debt market.
Analysts at UBA Capital plc said, “Rising yields on fixed income securities (treasuries and bonds) may douse local investors’ appetite for increased asset allocation to equities. Following further reduction in the U.S. Federal Reserve’s monthly bond purchase to $65 billion, our expectation of weaker portfolio inflows is reinforced, with implication for equity pricing on the NSE.
“We see the bearishness in the market as an opportunity ‘to buy low’, pending full recovery of investor sentiment. We believe the market has bottomed-out, with expected stability in the session ahead, especially as banking counters have found support. Market breadth remained negative and investors remained relatively bearish. We note the easing momentum of losses, as bargain hunters provided support, UBA Capital analysts added.
Liquidity pull which weighed on Nigerian equities contributed to the 3.17 percent decline in the value of equities listed on the main-board of the Nigerian bourse.
Listed equities opened last week with a value of N13.432trillion but closed the week at N13.005 trillion. Likewise, the NSE All Share Index (ASI) which tracks the performance of equities listed on the Nigerian Stock Exchange dropped from a high of 41,650.14 points to 40,571.62 points, a decline of 1,078.52 points or 2.59 percent.
Analysts at Partnership Investment Company plc said that with the liquidity squeeze comes flight to safety as portfolio investors seek to minimise their exposure.
“The increase in the CRR for public sector deposits and the commencement of parallel run of both Basel I and II minimum capital adequacy computation from January has put pressure on liquidity. This may dampen the market run that is expected with audited results coming in the short to medium term,” the analysts further said.
By: Iheanyi Nwachukwu
