Equities Market Performance Weakens as Investors Book Profit ahead of Corporate Releases

In the just concluded week, the latest report by the Nigerian Stock Exchange (NSE) on domestic and foreign portfolio participation in equities trading showed that total equities market transactions mellowed month on month (m-o-m) in February 2021 when compared to transactions done in January 2021.

Specifically, total transactions on the nation’s bourse decreased to N215.58 billion m-o-m in February 2021 (from 232.46 billion printed in January 2021) of which foreign portfolio investors’ transactions rose to N62.07 billion (from N47.52 billion). However, transactions by domestic players moderated to N153.51 billion in February 2021 (from 184.94 billion in January 2021).

Hence, the ratio of foreign transactions to local transactions improved to 29:71 in February from 20:80 in January. Breakdown of the FPI transactions in February 2021 showed that foreign portflio outflows increased by 26.83% to N39.05 billion, while foreign portfolio inflows rose by 37.59% to N23.02 billion.

Local institutional transactions decreased m-o-m by 15.14% to N99.71 billion in February 2021. Similarly, transactions by retail investors fell m-o-m by 20.23% to N53.80 billion. We saw sell-offs across investors’ categories as local players and foreign portfolio investors reduced their stake in the equities market, thus leading to weaker performance of the stock market benchmark index in February, following a 5.32% bullish run in January.

Notably, the NSE All-Share Index (ASI) plunged by 6.16% to 39,799.89 index points on February 26, 2021. Meanwhile, the Monetary Policy Committee (MPC) after its meeting held on March 22 and 23, 2021, decided to hold all key policy rate. The Monetary Policy Rate (MPR) was kept at 11.50%; asymmetric band retained at +100 bps and – 700 bps around MPR; Cash Reserve Ratio retained at 27.50%, and Liquidity Ratio retained at 30%.

The Committee’s decision to leave the key rates unchanged was based on the following considerations: the need for monetary and fiscal policy to push down the unabated rising trend of domestic prices via financing productive ventures, which is expected to boost aggregate supply; its recent innovative effort to maintain exchange rate stability, especially the incentives to attract diaspora remittances into the country, and the twin major challenges of taming the rising inflation and sustaining growth recovery in the economy, while focusing on the downside risks associated with the injection of more liquidity.

According to the Committee, the vaccination against COVID-19 had gained ground in major advanced economies, but the slow pace of vaccination in some emerging markets and developing economies would widen the uneven recovery of global output in 2021.

Also, It noted that the growing concerns associated with the efficacy of the vaccines being distributed, especially with the new variants of the Coronavirus, threatens the recovery of the global economy.

We note the sharp increase in the number of the Committee’s members to three, compared to zero vote in January, to increase the MPC rate by at least 50bps. This may be a signal of the Committee eventually increasing the MPR by 50bps this year as rising inflation and exchange rate pressure become more challenging to control – a scenario we pointed out in Cowry January 2021 MPC Update report. Hence, we expect the bias of the fixed income traders and investors to be a rise in yields and stop rates in 2021.

That said, we feel that the dwindled equities market in the month of February was chiefly on the back of the rising fixed income rates as the primary market opens up arbitrage opportunities in the secondary market; given the relatively higher stop rates than yields.

With the expectation of high stop rates going forward, further substantiated by the increase in MPC members favouring an increase in MPR rise, we expect equities market performance to be weak in Q2 2021.