By Chinwendu Obienyi
Following an impressive start to the year in which the Nigerian Exchange Group Limited (NGX) gained about 5.3 per cent in January, there have been losses recorded on the nation’s bourse.
Although the market was adjudged one of the best performing markets in 2020, the losses recorded after the gain in January 2021 has not been somewhat surprising due to the uptick in the fixed income (FI) market.
This led to domestic investors’ selling their equity investments in reaction to the rapid yet expected changes in yields in the FI market. Analysts as well as market operators had been bullish with the 2021 outlook, stating that the stock market would deliver further upside in the first half (H1) before retracing in the second half due to an uptick in FI yields.
However, yields began trending upwards in February and as a result, bearish sentiments dominated the local bourse in H1 2021 as the All Share Index (ASI) fell below the 40,000 points on February 26 – the first time since November 30 2020.
Daily Sun investigations reveal that the main trigger for the bearish mood in the market emanated from the Open Market Operations (OMO) auction conducted by the Central Bank of Nigeria (CBN) at the twilight of February, where stop rates rose by an average of 467 basis points to 8.5 per cent.
This sent signals to investors that the era of the low yield environment had finally run its course and with domestic investors dominating activities in the local bourse (year-to-date average share of transactions of 78.9 per cent as of May 2021), a reduction in portfolio allocation to equities ensued.
According to the NGX Domestic and Foreign Portfolio Investment (FPI) report, the value of transactions executed by domestic investors declined by 58.4 per cent to N76.9 billion as of May 2021 from N184.91 billion in January 2021. On the other hand, foreign investors continued to exhibit apathy towards the local bourse due to lingering liquidity constraints in the foreign exchange (forex) market and protracted delays in implementing structural reforms.
Considering that the bearish mood in the market so far in H1 2021 has been primarily impacted by the swift developments in the FI market, the fundamental question then is, “re there events on the horizon that could pressure yields downwards and trigger a renewed appetite for stocks?”
Analysts at Cordros Capital in their 2021 mid-year outlook report for financial markets, noted that a market rally is likely to occur in the second half (H2) of 2021. According to them, there is still room for the market to deliver positive returns in 2021, given that yields in the FI market will trend southwards, investors position themselves in interim-dividend paying stocks and increased activities from FPIs, supported by improved liquidity conditions in the Investors and Exporters’ (I&E) window.