The recently released report by the Nigerian Stock Exchange (NSE) on domestic and foreign portfolio participation in equities trading for the year 2019 showed that equities market transactions decreased when compared with that of 2018.
Transactions of the domestic institutional and the foreign portfolio investors (FPIs) moderated as these categories of investors chose to invest in fixed income securities for capital preservation purpose, a decision which also led to the
southward movement in yields of the fixed income securities.
Specifically, treasury bills stop rates crashed to single digit (364-day stop rate slid to 5.50% in December 19, 2019 from 15.00% in January 17, 2019); also, local FGN bond stop rates nosedived (5-year bond stop rate plunged by 425 bps to 11.00% in December 19, 2019 from 15.25% in January 17, 2019).
Notably, total transactions on the nation’s bourse decreased to N1.93 trillion in 2019 (from N2.4 trillion recorded
in 2018); of which FPI transactions plunged to N0.94 trillion (from N1.22 trillion) while total domestic
transactions decreased to N0.99 trillion (from N1.19 trillion).
Breakdown of the FPI transactions in 2019 showed that foreign portflio outflows declined by 22.78% to N0.52 trillion, while the foreign portfolio inflows dwindled
by 37.53% to N0.42 trillion.
Also, domestic institutional transactions moved southwards by 30.00% to N0.51 trillion in 2019 from N0.66 trillion printed in 2018. Similarly, retail investors commitment to buy shares waned (as transactions from this group dwindled to N0.48 trillion in 2019 from N0.52 trillion in 2018 respectively).
Amid the lower participation of all categories of investors in the equities market, the NSE All Share Index (ASI) plunged
by 14.60% to 26,842.07 index points on December 31, 2019 (from 31,430.50 index points on December 31,
Likewise, all of the prominent five sub-sectored guages plummeted y-o-y in 2019: the NSE Banking, NSE
Insurance, NSE Consumer Goods, NSE Oil & Gas and NSE Industrial indicies nosedived by 10.55%, 0.52%,
20.83%, 13.13% and 13.11% respectively to 356.84 points, 125.82 points, 592.85 points, 262.54 points and
1,075.60 points respectively.
We expect the year 2020 to be a favourable year for equities against the backdrop of low interest rate environment. This is because companies would be able to access funds at cheaper cost, thus reducing their interest expense and positively impacting their bottom lines.
Also, investors are expected to make a switch from fixed income securities yielding negative real returns to equities presenting positive real returns both in terms of dividend yields as well as possible capital appreciation especially in the first quarter of 2020.
Nevertheless, for short-term securities such as treasury bills, we expect slight improvement as it retraces to trade within the band of 5% and 8%. The long-term securities are expected to dangle within the band of 9% to 12%.
More so, we see the recent move by CBN, increasing the cash reserve ratio, as a calculated move to curb the excess-liquidity which induced rising inflation rate.
At the same time, we feel the move should impact positively on the exchange rate
as speculative attack on the greenback will be eased. In addition, FPIs will continue to benefit from the higher
OMO yields as CBN mops up the Deposit Money Banks (DMBs) excess liquidity via the rise in CRR by 500 bps.
Hence, we opine that investors should play more in equities market and focus on high dividend yielding stocks.
However, we advise to trade shares of banks cautiously in 2020 due to dwindling capacity of banks to generate income amid low yield environment and lower non-interest bank charges. For risk-averse investors, who prefer capital preservation and wish to invest in fixed income securities, we advise they play at the short end of T-bills maturities to avoid interest rate risk given our projection of rebound in T-bills rate later in the year.