Foreign portfolio investors who have been on the slide lines are likely to stage a comeback as transparency and liquidity will be restored to the market, analysts have said.
They noted that the exclusion of Nigeria from emerging market bond indices (especially the JP Morgan EM Bond Index and the Barclays Bank Government Bond Index) will likely be reviewed in the coming months
According to them, the special treatment status in the MSCI Frontier Market index is expected to the revised in the near term.
The analysts at United Capital said that based on the new policy, Secondary Market Intervention Sales, SMIS, would allow the CBN to participate in the interbank market while the authorized dealers who will be transacting alongside the primary dealers are free to source FX from autonomous sources as well as inflows from remittances, Foreign Portifolio Investments and Foreign Direct Investments.
In spite of this, they added, the CBN still retains its position as the largest single seller in the market, hence its strong market power in determining the direction of the exchange rate at any point in time.
“We think this swing power is necessary to minimize volatility in order to sustain offshore interest in the Nigerian market,” the analyst said.
On the implications for naira assets, they said that naira will appreciate in the parallel market as supply increases, though an initial volatility when the interbank/autonomous market opens on Monday, June 20 is expected.
“However, the gap between the interbank and the parallel market is likely to narrow. In the medium term, the sources of FX supply for BDCs are expected to widen, suggesting a possible strengthening of the Naira in that segment.
“We highlight that the 41 items classified as non valid for foreign exchange remain inadmissible in the Nigerian FX market, suggesting that the sources of demand at the parallel are likely to remain healthy.
“While we think intervention in critical sectors is in order, we are not convinced about how the CBN intends to enforce this restriction given that we expect the interbank market to operate in a way that allows players to set prices, as opposed to the order-driven quotes in the old FX regime,” they said.
To the Head, Research and Strategy, GTI Securities Limited, Mr. Chuks Anyanwu, the floating of the naira will see the official rate gravitate more towards the parallel market rate before finding its bearing, since the rate will now be determined by market forces of demand and supply.
He said, “We expect this to eliminate the incentive to hoard the dollar which will subsequently increase the dollar supply even from Nigerians.
“We expect the high currency volatility risk to subside thereby encouraging foreign investors who have been hanging in the fringes to take advantage of the opportunities in Naira denominated instruments (fixed income and equities).”
He added that local institutional investors like Pension Fund Administrators who have shown considerable apathy for equities investments as a result of the high volatility created by the exodus of foreign portfolio investors, who traditional accounts for up to 55 per cent of transaction volumes on the Nigerian bourse, will have the impetus to also take advantage of the opportunities in the market considering that most stocks that fit their stringent investment criteria’s are trading at considerable discounts.
“We also expect local retail investors to jump right into the market for stocks that have very strong fundamentals in anticipation of the resurgence of the foreign portfolio investors and local institutional investors who will only target cheap large cap companies trading at discounts because the market revival will start from top (large cap companies with strong fundamentals) to bottom of the market,” he added.