By Babajide Komolafe & Michael Eboh
The bullish trend recorded in the Nigerian Stock |Exchange (NSE) last week, is expected to continue this week.
However, the market is expected to record a slowdown at the beginning of the week, as investors begin to trade off their shares so as to take advantage of the few price gains recorded over the past couple of days.
Following the continued unattractiveness of the fixed income market, experts have called on investors to exercise caution when staking their funds in the capital market.
According to them, the current upsurge in the capital market is as a result of the unattractive rates in the bond market, adding that immediately situation normailises in the bond market, majority of the funds that left the fixed income market to the capital market, would return, causing a significant reversal of fortune on the NSE.
Last week, a significant improvement was recorded in the secondary segment of the market, as the value of investments on the NSE appreciated by N94.86 billion.
In particular, the value of investment on the NSE, represented by the market capitalisation, rose by 1.43 per cent to close the week at N6.747 trillion from N6.652 trillion at which it opened.
The All-share index also appreciated by 0.91 per cent to close the week at N27,753.13 points from 27,503.36 points at which it opened.
The decision of the Securities and Exchange Commission (SEC) to ensure the restoration of investorsâ€™ confidence, restore market integrity, deepen and broaden the capital market is expected to alert investors both local and foreign, on the commitment of the authorities to growing the market and it is expected that in a short while, there would be increase flow of funds into the market.
The Director-General of SEC, Ms Arunma Oteh, noted that these measures is against the backdrop of the effect of the global financial crisis and reforms in the countryâ€™s financial services industry on the capital market.
She noted that SEC, would henceforth, impose stricter sanctions on companies and operators that fail to render timely, complete and accurate information to the authorities.
It further stated that shares of companies that fail to release their quarterly, monthly or yearly reports on time would be suspended from trading until compliance is achieved.
This is expected to bring about a renewal of confidence in the market, as investors will be assured of the safety of their investments and of the efforts of the authorities to work towards developing the market.
SEC hinted of a future upgrade in trading processes on the Nigerian Stock Exchange, as it called on the NSE to upgrade its trading platform to meet current challenges of a dynamic and growing capitalÂ market.
Going by the assurance by SEC that the NSE informed it that it is working towards upgrading its infrastructure, investors would be confident that within the next couple of months, processes in the market would be improved and this is expected to bring about an increase in the level of investment in the market over the next couple of days.
Bonds’ prices to fall as slow downÂ persist The lull in the secondary Â Â Â market (over-the counter, Â Â Â OTC) for FGN bonds last week will persist this week owing to dwindling liquidity in the money market. Consequently prices will decline further while yields would continue to rise. Last week, the low level of liquidity in the interbank occasioned increased selling especially matured securities.
Investigation reveal that the market was quite throughout the week, as most investors (mostly banks and institutional investors) did not give any quote indicating they are not in the market.
The owing to the low liquidity levels, the market will experienced more selling especially from banks, prompting further decline in prices.
In the Over-the-Counter market for Federal Government of Nigeria (FGN) Bonds, a turnover of 265.1 million units valued at N322.06 billion was recorded in 2,537 deals, in contrast to the previous weekâ€™s turnover of 163.34 million units valued at N208.37 billion exchanged in 1,642 deals.
The most active bond in terms of turnover, the 6th FGN Bond 2029 Series 3 with a traded volume of 37.95 million units valued at N59.42 billion in 346 deals. This was followed by the 5th FGN Bond 2011 Series 3 with the exchange of 32.8 million units valued at N36.74 billion in 309 deals. Of the 39 FGN bonds available, 28 enjoyed investorsâ€™ patronage, compared with 18 in the preceding week.
An improvement is expected in the performance of the mutual funds listed on the Memorandum Quotation segment of the Nigerian Stock Exchange (NSE), this week, as come to the realisation of the importance of the collective investing scheme.
Following uncertainty over the future of the capital market, especially with the anticipated rebound in the fixed income securities market, investors are beginning to rely on the expertise of fund managers in making investment decision.
A number of investors now invest in mutual funds which in turn invest certain percentage of the funds at their in capital market and fixed income securities instrument, thereby, spreading their risk portfolio.Last week, of the 26 mutual funds listed in the memorandum quotations sector, 10 recorded price improvement, two posted losses, while 14 remained unchanged.
Naira to appreciate this week
The declining fortunes of the naira in the last three weeks is expected to change this week, with the naira appreciating against the dollar.
Indication to this emerged last week, with the Central Bank of Nigeria (CBN) increasing amount sold by almost 100 per cent at the last auction held on Wednesday. From the usual $250 million it sells per auction the apex bank sold N427,300 million.
Although the naira still lost nine kobo it earlier gained in the first auction on Monday, the action of the apex bank indicated readiness to intervene to forestall further depreciation of the naira.
In fact, analysis of the foreign exchange auctions conducted by the CBN for the week, show that demand rose byÂ 16.7 per cent to $794.86 million from $681 million in the previous week, the amount sold by the apex bank rose by 50 per cent to $677 million from $450 million.
The increased supply helped the naira to end the week on a stable note compared with the previous week, as the official exchange rate closed at N148.81 per dollar. This marked the first time in the last one month that the naira would end the week on a stable note.
But, at the interbank market, the naira continued its downward trend, losing 36 kobo to the dollar. The interbank exchange rate rose to N151.2875 per dollar from N150.9250 the previous week.
Uncertainty due to declining liquidityÂ A cloud of uncertainty hangs over the interbank money market this week due to the decline in liquidity to frightening levels. From over N600 billion in March, market liquidity has been declining steadily, to close at N100 billion last week. Although inflow from statutory allocation is expected this week, the volume of outflow through foreign exchange purchases, treasury bills and bonds might undermine the effect of the inflow. Should this be the case, cost of funds would further rise this week.
Even if the inflow is significant enough to outweighed the outflow, the improvement in liquidity would be temporary, lasting at best next week, hence cost of funds resumingÂ upward movement.
Last week cost of funds rose sharply by over 500 per cent due to panic among bank treasurers over the dwindling level of liquidity in the market. Interest rates on Collateralised lending or Open Buy back (OBB) and Overnight lendingÂ which opened at 1.05 per centÂ and 1.2 per cent rose to close the week at 6.0Â per cent and 7.0 % respectively.
Investigation reveals that the sudden rise in cost of funds which started on Monday when interbank interest rates rose by over 200 per cent,Â was triggered by panic among interbank market operators over the steady decline in market liquidity from over N600 billion in March to about N290 billion, the previous week. The situation was aggravated by withdrawal of N115 billion by Nigeria National Petroleum Corporation (NNPC) during the week.
This, according to sources prompted fears that the market is at the end of the excess liquidity regime to that of scarcity. This fear was heightened by information that one or two banks recently borrowed from the Central Bank of Nigeria (CBN) through the Standing Lending Facility (SLF).
As result some of the big banks, who are net placers of funds in the market, started bidding up their rate, and others followed suit.
A bank treasurer who confirmed this development said that, â€œThe whole thing is driven by panic. You know the CBN has been mopping up through treasury bill sales, and have been selling foreign exchange heavily. These caused the liquidity in the market to fall steadily. Imagine from N1 trillion we are now down to about N200 billion. So the mindset is that the market is about to turn from excess liquidity to scarcity, and everybody seems to be positioning for the expected change.â€