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Just of recent, a group of analysts and investors discussed whether or not now is the best time to take positions in stocks given how cheap they are largely driven by the impact of investors’ negative sentiment inherent in the market fuelled mainly by a number of domestic factors.
However, in contrast to the need to take positions now, they all agreed that now isn’t the best time and would prefer to invest in safer asset class preferable money market instruments with little or no effect from shocks in the macro and global economic space.
Justifying this claim is trend witnessed in Nigeria foreign capital importation data released by the National Bureau of Statistics (NBS) which revealed increased exposure of FPI’s into money market instruments against other asset classes in Q1 2019.
Nigeria’s capital importation in Q1 2019 rose to its highest in six years and gained the most on a quarterly basis since Q3 2017 as carry trade increased in 2019.
While 84.21 percent was accounted for of capital imported through foreign portfolio investment, a CAGR analysis revealed that in the last 6 years in Q1 periods, inflows into money market instruments had accelerated 116 percent year on year, while 3 percent into the bond market year-on-year.
However this isn’t the case for the equities market has over the period, investments have decelerated by 22 percent.
Also, the last five fiscal years has seen foreign portfolio investor’s exposure in the Nigerian money market rise at an average of 71 percent in value annually against the bond and the equity market.
The equity market which stood worst off during the period recorded a decline in FPI’s exposure by 32 percent on the average in value while the bond market by 20 percent.
“This trend shows that investors still remain sceptical towards investing in the equity market due to the exchange rate system in which we operate and exposures of companies listed in the equity market to shocks in the economy,” Gbolahan Ologunro, analyst at CSL stockbrokers told BusinessDay.
“Investors are rotating their funds into that which they know is safer for them which are the money market instruments,” Ologunro added.
This signals however the perceived heightened risk position of Nigeria by foreign investors on the back of some economic challenges.
Some analysts also blame foreign investors’ rotation on CBN’s Open Market Operations in the money market which has been termed aggressive over the years.
“The CBN has been issuing lots of OMO bills which are being bought by foreign investors. The amount of OMO bill as at Q1 2019 so far was close to about $16 billion,” Abimbola Omotola, macroeconomic and fixed income analyst at Chapel Hill Denham told BusinessDay.
Typical in the nature of money market instrument is the fact that they are short dated, hence vulnerable to rollover risk which the major downside risk, to this end “upon maturity, the CBN would continue to offer attractive interest rates to keep the foreign investors invested in Nigeria,” Omotola added.
Meanwhile, trends witnessed in the last six years have shown that foreign portfolio investors are proved wariness towards duration risk and most especially towards equity risk.
“Investors are favouring the short term instrument now above bonds as well as equity partly because of macro outlook which has dampened the appetite for equities as well as the relatively high inflation outlook,” Omotola explained.
Analysis of average daily yields of Nigeria 1-year T-bill against 2 and 10 year bonds revealed that in the last 6 years, average yield on 1 year T-bill stood at 14.35 percent against 14.25 percent and 14.10 percent of benchmark maturities.
Going forward, analysts anticipate a sustained trend in money market instruments against stocks and bonds given the exposure of listed companies to macroeconomic shocks.
“There is low apathy from FPI’s in picking up equity investments in the domestic economy. Cost of equity is quite high and just very few companies are able to deliver ROE far above cost of equity to investors, hence less attractive to foreign investors.” Ologunro explained.
The returns of the stock market in dollar term since the global financial crises has been negative due to fact that Nigeria equity market has not been able to rebound to a significant level of FPI investments in the equities market.