Why CBN’s $50b intervention fails to rally confidence in stock market

• Foreigners shun market over dividend repatriation anxieties
• Share prices stagnate as poor valuation fails to attract investor
• Operators task govt on fiscal policies to reverse trend

Despite the over $50 billion intervention by the Central Bank of Nigeria (CBN) in the last three years, Nigerian stock market has continued to face uncertain future, with investors neglecting equities and diverting to other instruments.
The Guardian observed that though corporate earnings improved in some sectors of the market, especially banking, prevailing challenges remain overwhelming, shadowing such improvement in the share prices of many equities.
However, to stall continued capital flight, stakeholders have tasked the government on economic policies that will urgently respond to the macro challenges.
They noted that investors were not patronising the market to buy stocks because of poor liquidity and low confidence that have shrouded the market.

Even foreign investors that constitute a large portion of the N170 billion unclaimed dividend in the multinational firms listed on the exchange, they said could not repatriate their dividend due to U.S. dollar shortage.

The fewer investors that are risk-averse patronise other asset classes especially forex trading and debt market instruments, causing the share prices of listed firms to remain stagnant.

In 2018, N642.65 billion in foreign portfolio investment outflow was recorded, while foreign investors withdrew N523.42 billion and N481.93 billion during the corresponding period in 2019 and 2020.

A breakdown of foreign outflow since the beginning of the year showed that foreign investors withdrew N30.79 billion in January, N39.05 billion in February and N20.28 billion in March 2021, while domestic investors pulled out N86.35 billion in January, N69.28 billion in February and N93.31 billion during the same period.

Similarly, foreign inflow dropped steadily from N576.45 billion in 2018 to N419.13 billion in 2019 and N247.27 billion in 2020, totalling N1.24 trillion.

A look at CBN’s forex interventions into the economy in the past two years showed that within a 15-month period covering October 2018 and December 2019, the CBN injected over $43.52 billion to defend the local currency.

In the first quarter (Q1) of 2020, the apex bank made the first forex intervention of $253.38 million and by the second quarter (Q2), the interventions rose to $1.2 billion. As of the third quarter (Q3), the apex bank increased its intervention to $1.94 billion and by the fourth quarter (Q4) of 2020, it injected $5.62 billion into the market.

The country yet faced an excruciating foreign currency crisis in 2020 as the fall in oil prices, global lockdown due to COVID-19 and a dearth in capital importation affected Nigeria’s trade balances, forcing multiple devaluations during the year and a wide disparity between the official and parallel market exchange rates.

In previous years, the CBN has had to rely on oil dollars, non-oil imports and capital importation to boost the country’s foreign currency balances. However, all three major sources recorded massive drop as Coronavirus raged on and foreign investors stayed away.

For example, foreign currency inflow from oil revenues in 2019 was $15.8 billion compared to $10.5 billion in 2020. Non-oil forex inflow also went from $40.8 billion in 2019 to $29.6 billion in 2020.
These factors have caused liquidity and low confidence that have shrouded the Nigerian market in the past few years. Notwithstanding the combined profit of the five top-tier banks, already in excess of N727 billion, investors are showing apathy towards banking stocks.

According to 2020 financial statements analysed by The Guardian, the total assets of the top five bank groups – Access, First Bank of Nigeria, Guaranty Trust Bank, United Bank for Africa and Zenith – rose to N37.5 trillion last year, from the pre-pandemic value of N29 trillion, which translates to about 25 per cent growth year-on-year.
The five banks grew their Profit After Tax (PAT) from N666 billion to N727 billion from 2019 to 2020 representing a nine per cent profitability growth in an economy that witnessed a negative GDP growth rate of 1.8 per cent in 2020.
However, the five banks are currently trading at a value described by operators as very low compared to their fundamentals and the appreciable profits posted in their full year results.
Investors argued that banks’ shares as well as other stocks trading on the exchange are currently selling at a discount, considering their book value, due to sell-off and investors’ apathy and economic turmoil occasioned by the socio-political uncertainties.
In his reaction, a stockbroker with Royal Guaranty Trust Limited, Paul Uzum, said the impressive full year results of the five banks could not reflect in their share prices as weak demand continued to threaten the performance of their stocks.
He attributed the lull to apathy on the part of foreign investors who are not participating in the market currently due to difficulty in repatriating their dividends or proceeds from sales.
“They can’t bring in their forex when they are not sure they can take it out when needed. So participation in our market is now limited to local Pension Fund Administrators (PFAs), Asset Managers, High Net-worth Individuals (HNIs) and retail investors. These foreign investors used to control over 50 per cent of daily market trades.

“The economic conditions in the country are really scary for investors. From stagflation, to too frequent a recession or low economic growth, rising fiscal deficit and high debt burden, coupled with insecurity and threats of a break-up. All these have increased the country risk, and investors need higher yield to invest in such an environment.”

In 2017, when the results of the five banks hit the market, with N606.1 billion full year profit, which was lower than the 2020 performance, banking stocks, driven by the tier-one banks, offered the best returns to investors in the equities market.

The banking sector of the NSE, which was rated second best bourse in Africa and 11th best in the world in 2017 gave equity investors a 73.3 per cent return on investment in one year while stock prices witnessed unprecedented capital appreciation.

For instance, First Bank rose from N4.39 in 2016 to N7.00 in 2017, while United Bank for Africa increased from N4.80 to N9.90. Guaranty Trust Bank, Access Bank and Zenith Bank also appreciated from N21.61, N5.92 and N16.65 to N42.55, N10.00 and N24.79 per share respectively.

Dangote Sugar improved from N7.00 to N17.64. Okomu oil rose from N30.00 to N67.22. Presco increased from N35.70 to N66.
Also, the share prices of companies from other segments of the market also grew significantly. Flourmills increased from N22 to N29, while Honeywell also grew from N1.80 to N2.20. 11 Plc, now Ardova Petroleum, stood at N159.65, while Conoil rose to N28.00, Forte oil appreciated to N43.20, MRS stood at N27.46.  Total, Guinness, International Breweries, Nigerian Breweries, Unilever, Flourmill, GSK and Beta glass rose to N230.00, N98.58, N57.84, N137.70, N41.89, N34.00, N22.80, and N51. 31 respectively.

As of the first quarter of 2018, the banking sector was already on a positive trend due to the high demand for stocks in the previous year. Now, it is a different scenario when compared to the current performance where the sector is still trading in negative territory in the second half of the year.

However, after the 2017 unprecedented rally, contrary to general expectations of positive earnings in 2018, political intrigues ahead of the 2019 general elections made stock market investors lose N729 billion in just three months of decline.

Analysts blamed the flattish look of the market on the tension that has plagued the political space in recent times. They said killings by Fulani herdsmen and cases of political thuggery aggravated apathy in investment, especially on the part of foreign investors.

Due to uncertainties that shrouded the 2019 elections, coupled with other macro economic issues, the stocks had flattened, a situation that has extended to 2021.

Consequently, First Bank, which rose to N7 in 2017, depreciated to N6.35, while UBA dropped from N9.90 to N7.10. GTCO, Access Bank and Zenith Bank also plummeted from N42.55, N10.00 and N24.75 to N29, N9.75 and N18.50 per share. Dangote sugar depreciated from N20 to N13.80 while Honeywell also plunged from N2.20 to 99 kobo.

Analysts, who spoke with The Guardian, stated that the declining trend would continue because the macro-economic environment is still facing so much uncertainty, leaving the economy to run entirely on monetary stimulus.

They also pointed out that the current marginal gains recorded by some of the firms is due to anticipation of improved half-year (H1) earnings and accompanied dividend declarations of listed firms, noting that this would not be sustained if there are no positive policies that would reverse the current harsh micro economic environment.

Professor of economics at Olabisi Onabanjo University, Ago-Iwoye, Sheriffdeen Tella, said the purchasing power of the average Nigerian, which is quite low, is worsened daily by rising inflation, unemployment, underemployment and the impact is negatively felt on turnover, profits, dividend value and payout, and investment incentives in the capital market over the year.

“The poor performance of the economy affects investments and share prices. Even the profits of the banks cannot be related to their abysmal contributions to the productive sectors of the economy.

“Investors in Nigeria don’t always look at profits alone in investing but other factors like payout dividend, public comments, industry news. The dividends have not been attractive.”

The Managing Director of High Cap Securities, Imafidon Adonri, also expressed concern about the undervalued state of the Nigerian stock market.
He said the NSE has been faced with an unprecedented lull since the first quarter of 2018. This is after the market had recorded a significant upsurge in 2017 with an increase of N4.5 trillion in market capitalisation, which made it the third best performing stock exchange in the world.

According to him, there is the need for the economy to be properly structured and given a new direction so that all sectors would recover and impact positively on share prices on the exchange.

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