Stock Market: Bearing the Brunt of Volatility in Naira Value

As the uncertainty in the foreign exchange market and the attendant erosion of the value of the Naira continue to take a heavy toll on the economy, investment analysts said the unfavourable development is sending jitters to portfolio investors and multinational firms, who are already finding it difficult to repatriate their funds in dollars, reports Festus Akanbi

Nigerian monetary authorities are in a desperate situation. This desperation is underscored by the sheer onslaught against saboteurs in the foreign exchange market on one hand, and the cocktail of measures designed to halt the dangerous fall in the value of the Naira.

But can anybody blame the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, for being agitated during his press conference a fortnight ago, where he unmasked operators of the controversial Aboki FX, for misleading the Nigerian foreign exchange market?

Some financial market analysts who threw their weights behind the crackdown on fx market manipulators pointed out that the pains and dangers of the persistent volatility in the forex market have extended beyond the limit of importers, parents, and travellers who desperately need few dollars to meet personal obligations and emergencies, to multinational companies and portfolio investors who need dollars to repatriate their dividend abroad.

FX Scarcity takes Toll on Capital Market

THISDAY investigations showed that some foreign shareholders are finding it difficult to access their dividend because some of the companies where they hold shares could not muster enough dollars to cover the naira values of their dividend.

Other categories are companies undertaking heavy construction works, which need to import heavy machinery which can only be procured in foreign currencies, especially in dollars. This category of companies is said to be at the receiving end of the foreign exchange market volatility. Their inability to import all the needed machinery is said to be impacting their performance, a pathetic situation that investment analysts described as a recipe for failure at the end of the operational year when investors would be waiting for the dividend.

This scenario has been blamed for the uncertainty in the stock market leading to a flurry of desperate activities of investors. This is coming on the heels of the report that foreign investors’ exit impacted the Nigerian equities market negatively in the first seven months of 2021 as investors lost N973.2billion.

Specifically, market capitalisation, which measures the value of all stocks dropped by N973.2billion in seven months to N20.083trillion from N21.057trillion the stock market opened in 2021.

Investment analysts believed that the high exchange rate volatility in Nigeria, among others, led to a precarious operating environment which can be attributed to the reason why Nigeria was not only unable to attract an appreciable chunk of foreign investment to its fullest potentials but also had a limited domestic investment. As such, despite the vast investment opportunities in agriculture, industry, oil and gas, commerce, and infrastructure, very little foreign investment capital was attracted relative to other developing countries and regions competing for global investment capital.

Lower Naira Value, Lower Purchasing Power for Stocks

Market analysts, who called for sustained efforts to stabilise the fx market said, the capital market is already having its share of the negative development in the value of the Naira.

Responding to THISDAY inquiries, Managing Director/Chief Executive Officer, SD&D Capital Management Limited, Mr. Idakolo Gabriel Gbolade, explained: “The sustained fall of the Naira will negatively affect the capital market because the value of the Naira drives the price of stocks in the capital market.

“The movement of stocks is determined by the law of demand and supply. The lower value of the Naira will cause lower purchasing power for stocks and factors like inflation, interest rate, exchange rate, and government policies are key factors that affect investors decision as regards taking positions in the capital market.”

On his part, Executive Director, Cordros Capital Limited, Mr. Femi Ademola believed that the instability in the value of the Naira may not affect local shareholders much, explaining, however, that foreign shareholders will be seriously affected.

According to him, “Investors in the capital markets generally seek two types of returns; asset return and currency return. While both domestic and foreign investors seek attractive asset returns, only foreign investors are usually concerned with currency returns. This implies that the most significant implication of the fall in Naira values is the reduction in the activities of foreign investors in our capital market. It is not that foreign investors are looking for a strong Naira. What they require is a stable currency so that they can protect whatever they earn as asset return.

“Some domestic investors also benchmark their portfolio in foreign currencies; hence they are interested in a stable currency. In addition, stock exchanges are globally benchmarked in USD; hence a fall in Naira value will negatively impact the value of the exchange.”

Due Diligence

For domestic investors seeking to invest in stocks at this time, Ademola called for due diligence before making a choice.

Asked to advise potential investors in the Nigerian capital market, Ademola said, “On the one hand, the fall in Naira values is beyond the Nigerian capital market, since currency trading is not a strong activity in Nigeria yet. On the other hand, investing in the Nigerian market will always be in local currency while the investors would be expected to hedge the currency exposures whenever required. My advice to investors seeking to take positions in the capital market is to conduct very sound research and invest in stocks with strong potentials that match their expectations and investment horizon.

Investors with foreign currency exposures should seek appropriate hedge to their exchange risk. They can contact professionals for help.”

The Cordros Capital Director believed the Nigerian capital market seeks to provide asset returns that are large enough to meet the investors’ expected return and currency return if required. Discerning investors, according to him, understand that the capital market will always provide investors with good returns over time.

He pointed out that knowledge about this may require active management that may only be provided by professional managers. “Active investors would also know how to create a diversified portfolio, both across asset classes and among stocks. This may require a temporary move away from a particular asset class to another but not away from the market.”

On his part, Gbolade explained that “New investors taking a position in the Capital markets must look at the performance of the sector and the company they wish to invest in taking cognisance of the antecedent of such companies in the past and their profitability trajectory as well as government policies as regards their sector/ company of interest.”

He, therefore, advised shareholders to diversify their investment into the money market which presently has the capacity for higher profitability as against stocks, bonds, and bills.

Devaluation of the naira has a direct impact on the price of stocks. This is because the stock market is like a leading indicator and reflects the mood of things to come before any other market does so.

However, analysts believe that potential investors might keep away from the market to watch the performance of the Naira and activities at the market for now, instead of investing.

What that means is that investors will need more money to maintain their standard of living. That may imply that they may have to sell off some stocks to enable them to meet their recurring expenditures. Cumulatively, this explains the selling pressure that has kept the market down. This trend is likely to continue for some time.

They pointed out that the upsurge in interest rate from the increased inflation might make investors divest from the market.

“Even foreign investors will divest from the local capital market of a depreciated currency, and this will lead to bearishness,” a stockbroker told our correspondent.

He said this is so because the fall in the value of the Naira hurts the purchasing power of investors.

“What that means is that investors will need more money to maintain their standard of living. That may imply that they may have to sell off some stocks to enable them to meet their recurring expenditures,” he said.

Insulating Share Price Values

Analysts are divided on the possibility of sharp movement in share price as a result of the foreign exchange crisis. In his opinion, the MD of SD&D Capital Market Limited said companies’ share prices/ values are continuously losing value due to the inflationary trends in the economy and that the weakness in the value of the Naira is causing foreign investors to divest from the capital market.

However, Ademola disagreed, explaining that the Naira value may not necessarily cause an upset in share values. “There are many conditions that affect a company’s share prices. These include financial performance, economic and industry trends, and perceived management capabilities. The exchange rate situation will not directly affect share prices. It can only affect the financial performance of listed companies. For example, the cost of sales may increase due to the increased cost of imported inputs and other foreign currency-denominated expenses.

“If the company has obtained loans in foreign currencies for example through bank loans or corporate Eurobonds, the fall in Naira will increase in the finance costs and reduce the company’s distributable profits to shareholders. This way the company’s share price can be negatively affected,” Ademola stated.

Quoted companies are expected to make their financial performance available at the end of the year, but some watchers of the unfolding exchange rate crisis said many investors, especially retail shareholders may be disappointed. On what should be expected at the end of the current operating year, Ademola believed the result will be mixed.

According to him, “Companies with liabilities in foreign currencies at the end of the period will report increased costs and reduced profits while those with foreign currency assets will report improved performance.”

Sharing Ademola’s view, Gbolade explained that “Most quoted companies except banks will likely declare lower ROI which will lead to lower dividend payout to shareholders. The quoted companies will most likely reinvest their profit back into the business to strengthen their operations while those that would declare losses will have to decide how to increase their capital at the end of the year.”

It is hoped that the nation’s forex market will respond positively to the current treatment being administered by the CBN without further delay so that all the sectors of the economy can roar into life again.

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