The nation’s capital market in the first half of 2020 recorded increase in domestic investors’ participation, despite world economic depression, following the coronavirus pandemic. In this report AMAKA IFEAKANDU writes on its implications on the economy on the face of negative Gross Domestic Product (GDP) growth.
The equity market
Many decades after the great global economic depression, the world is witnessing another economic downturn caused by the outbreak of coronavirus pandemic.
Although the virus is ravaging the whole continent in a manner that is highly novel, one area of the economy that have to some extent stayed neck high above the stormy waters is the capital market, particularly the equity market. The loss recorded so far, is not monumental.
The significant increase of the local investors participation within the period mitigated the distraction of COVID 19 upon the capital market.
Available data showed that in first half of this year, the Nigeria capital market witnessed increased participation of the domestic investors, despite coronavirus outbreak ravaging the global economy.
Increased investments
The increased investment by local investors according to operators became noticeable after the Central Bank of Nigeria (CBN) barred individuals and local corporates from investing in the treasury bills.
They also, said that low interest rates and yields in other investment windows in money market supported inflow of funds to equity assets as the market and companies have shown resilience in the midst of coronavirus and weak economic fundamental and relatively low liquidity.
This according to them positioned investors to use stock market to hedge against inflation which thrown many investment return into negative.
According to the latest data from the NSE,total domestic transactions accounted for 50 per cent of the trading carried out in 2019 while foreign investors transacted 49 per cent stocks traded within the period.
Expatriates participations declined
The report showed that total transactions from January to June at the bourse fell to N1.003 trillion from N1.089 trillion reported at the corresponding period of last year.
An analysis of the investment showed that expatriates participations declined as record shows that they traded shares worth N396.63 billion or 39.52 per cent of total transactions at the bourse relative to N472.78 billion or 45.84 per cent recorded last year.
Contrarily, local investors pushed shares worth N606.93 billion in the first half of 2020 which represent 60.48 per cent of aggregate trade on the floor of the exchange within the period as against N614.73 billion or 54.16 per cent that they transacted last year.
The record revealed that local investors dominated the market while their expatriate counterparts continue to exit the market in search of opportunity elsewhere.
This is further amplified by the wide margin between foreign capital inflow and outflow in the market.
NSE report
The NSE report further showed that, while the expatriates acquired equities worth N129.95 billion in the six-month period this year, compared to N214.97 billion the same period last year; they ejected N266.68 billion compared to N257.81 billion outflow last year.
This implies a net repatriation of N136.73 billion, higher than total invested fortune as against N42.84 billion recorded as net outflow last year.
Interestingly, the increase in participation of domestic investors in any economy is seen as a development that would have positive impact on the growth and stability of the market.
Apart from investors having an opportunity to increase their investment, they take advantage of low price of equities in the market to invest in stocks that will bring huge returns in future.
While describing the domination of local investors in capital market as a step in the right direction, operators noted that dominance of foreign investors in the market have made stock market so volatile and unstable for long term savings and investment.
Foreign capital inflows
Their argument came from the fact that whenever portfolio investors are investing in stocks the price move up and once they begin to sell, equity prices crash, as they always offload their investments on any small negative information or little shock in an economy.
Financial experts also argued that despite, some shortcomings of foreign capital inflows, a developing economy such as Nigeria needs constant capital inflows, especially the foreign portfolio investments to maintain liquidity and capitalisation in the stock market.
However, the recent report on the increase in inflation rate to 12.87 per cent and the contraction of real Gross Demestic Product (GDP) to negative 6.1 per cent has exposed the weakness of the economy and created fear that the situation may likely bring dislocation in the capital market if government failed to adopt policy that would boost liquidity in the financial system. This is because liquidity squeeze in a system reduces appetite for investment.
Accusing finger
Pointing accusing finger on the decline of GDP to the negative impact of the COVID-19 pandemic and the global lockdown measures on the various sectors of the economy, the report showed that of the 19 sectors in the NBS’s classification, 13 recorded contraction while six sectors recorded expansion.
Specifically, among the sectors that recorded growth profile, the financial institution and telecommunication sectors were stand-out performers with 28.4 per cent and 18.1 per cent expansion, respectively.
Clearly, credit growth amid CBN’s LDR policy, Forex revaluation gains, increased digital adoption and strategic positioning of these sectors supported their performance.
On the contrary, Oil Refining, Road, Air, Rail & Pipelines Transports, Accommodation & Food Services, as well as Construction were the worst hit with over 30.0 per cent contraction each or negative 52.0 per cent on average.
Struggling economy
Commenting on the nation’s economic growth profile and domestic dominance in capital market, the Chief Research Officer, Investdata Consulting Limited, Mr. Ambrose Omordionm,
said the struggling economy since the last recession in 2016 has been on one step forward and two backward due to policy summersaults, mismatch, insecurity and lack of coordination among government agencies, monetary and fiscal authorities.
He said “the ongoing coronavirus outbreak has finally exposed the weak economic reforms and propel the worse contraction since 2004 as second quarter GDP returned to the negative territory by 6.1 per cent from first quarter position of 1.87 per cent. This was attributed to two months economic shut down and low crude oil prices, low industrial productivity and high inflation, despite the seeming low interest regime.”
Government intervention
Speaking further he said “We expect little improvement in third quarter with the injection of funds by way of government intervention to critical sectors to mitigate the effect of pandemic on the economy, as easing of the lockdown continue to trigger economic activities.”
He explained that the stock market second quarter performance was positive and there was a great disconnection from the economic downturn for that period, as traditional sectors like oil and gas, consumer goods, banking and services suffered setback as reflected in the corporate earnings from these industries, while the rally in telecoms, healthcare, agriculture and others supported the uptrend. He stated that the negative GDP growth will not have much effect on the market because it’s a historical data and the economy is likely to look up at end of third quarter with all these CBN moves to restart the economy again.
He said in the current situation government policy makers and economic managers should rethink and reformulate their policies that Will drive growth and progress, while the regulators need to double their efforts on investors education, reduce cost of transactions, protect investors and make sure corporate governance are adhere to boost investors confidence.
Managing Director, APT Securities and Funds Limited, Malam Garba Kurfi said that investing in stocks at the current market price is one of the best option to hedge against inflation and devaluation of naira.
Treasury Bills
He said that it is not wise for investor to hold money that earned three or four per cent in Treasury Bills or about seven per cent in Commercial Papers or money market that is call or fixed deposit while inflation is at about 13 per cent, they are better off if they hold assets.
He pointed out that the CBN policy that barred both individual investors and corporates from participating in Treasury Bills and decline of money market rates to single digit returns compelled local Investors to look elsewhere for positive returns, adding that with an inflation rate of 12.87 per cent which give negative returns to investment, pushed local Investors to invest into Capital Market.