The Managing Director of FBNQuest Securities, Fiona Ahimie, reflects on the performance of the Nigerian stock market, the market performance and the strong stock market rally, and how new products are expanding the scope of possibilities for investors in equities in this interview.
After a good start to the year, the Nigerian stock market has witnessed a steady downturn in the last few weeks. What do you make of the market’s performance?
Indeed, several market watchers predicted a strong market performance in the first quarter of 2021. However, I believe the stock market’s recent performance reflects the impact of renewed uncertainty on investors sentiment.
Over the years, I have observed that the market generally rallies on positive sentiment like we witnessed towards the end of last year when interest rates were close to historic lows. Whenever there are notable developments for investors to process which challenge prior assumptions, it is not unusual to see a fall in share prices.
Treasury bill rates have risen by a few percentage points this year. More significantly, the central bank appears to be reintroducing a policy designed to lure foreign investors back to the Nigerian local fixed income market by raising the OMO treasury bill rate. This rate is now up to 10 percent for the first time in several months. There is also uncertainly around the exchange rate because, unlike the case for extended periods last year, the apex bank has allowed the naira to weaken gradually in the official market since mid-January.
So, to summarize, over the last month or so, I think that investors have adopted more of a wait-and-see approach towards the stock market as they try to understand the central bank’s monetary policy strategy.
So does this mean that we should expect more declines in the stock market until there is greater clarity around the direction on monetary policy?
Greater clarity will certainly help. Nevertheless, I think that the market should stabilize over the next few weeks on the back of strong corporate results and the announcement of dividends and other corporate actions by companies that report their 2020 full year results. We saw a positive reaction to the recent Zenith Bank full year results and dividend announcement. I think that similar announcements by other banks should support the market. We expect most banks and blue chip companies to report their full year results and corporate actions by the end of March. I think that there is scope for the market to rise moderately over the next few weeks.
Looking further ahead, what are your expectations for the market in the second and third quarters of the year?
It is a tough call over the short term. While I expect a recovery over the next few weeks as investors take positions in search of high dividend paying stocks, there is still a cloud of uncertainty over the market for the rest of the year. What is the central bank’s monetary policy game plan? How much higher will interest rates rise? How strong will be the nascent economic recovery be? Will the central bank allow the naira to weaken further? These are major questions that investors will be mulling over as more information become available over the course of the year. Our in-house research view is for the market to rise 20 percent this year on the back of an improving economic environment and strong corporate results, especially from some banks and a few non-financial companies – assuming yields don’t rise too fast and too high. However, I think it could be a volatile year as we have seen in the first 2 months.
How can stock market investors profit from the market volatility?
The market is clearly evolving. Depending on the position an investor takes, he/she can profit from rising or falling stock prices. This is because the stock exchange has now created a framework for securities lending. This is the market practice of temporarily transferring securities, for a fee, from one party (the lender) to another party (the borrower), with the borrower agreeing to return the securities to the lender at the end of the agreed loan term. FBNQuest is delighted to be one of a few accredited stockbroking firms to act as intermediary stock lending agents for securities lending. This implies that we are one of a handful of brokerage firms that investors can work with to lend their shares to other market players.
I think the introduction of securities lending to the…