CBN’s Easing Stance to Sustain Equity Market Rally ~FSDH
Analysts at the FSDH examined the ongoing rally at the nation’s equity market and concluded that the CBN’s recent liquidity easing policies remain positive to the growth of the local bourse.
In the past 6 weeks, the Central Bank of Nigeria (CBN) has adopted an easing of monetary policy stance on the back of a looming recession in the Nigerian economy.
This is reflected by a series of policy changes including:
Cutting the MPR by 100bps in its MPC September meeting.
Adjusting the asymmetric corridor to +100bps/-700bps from +200bps/-500bps around the MPR Cutting minimum interest rate on savings accounts to 10% of MPR (i.e. 1.15 percent) from 30 percent of MPR (i.e. 3.75 percent) previously.
We note that prior to that, the CBN had initiated changes in its monetary policy stance via orthodox and unorthodox policies including maintaining the Loan-Deposit ratio at 65 percent as well as cutting the MPR by 100bps in its May meeting earlier in the year.
In addition, the apex regulator in 2019 made access to the OMO auction window proscriptive for local non-banking investors in bid to extend liquidity into real economic activities.
As a result of these policies, interest rates across all different money market investment vehicles have trended lower as shown in the chart below:
These policies have created an unusual liquidity situation coupled with a lower yield environment which has been supportive of rally in risk assets like equities.
This reconfirms our earlier prognosis which projected a strong rally in Nigerian equities from September. That said, we continue to see more room for a strong rally for the rest of the year as the CBN continues to maintain its easing stance.
We think the low yield environment would continue to support risk on sentiment among domestic institutional and retail investors as they move funds from low yield assets to equities in bid to improve risk-reward ratios of their portfolios as well as lack of adequate alternative investments.
Truly, we have seen improved participation among domestic investors in 2020. For example, the Pension Industry Report for Q2 2020 showed that PFAs increased their stake in equities by N82.8 billion in Q2 alone (we expect this number to be significantly higher in Q3 & Q4) while the NSE Domestic and FPI report shows institutional investors (PFAs, Asset managers, Corporate investors etc.) have increased their participation in the equities market by 10.3 percent YTD (as at August 2020).
Despite these improvements, we expect to see significantly improved participation among these investors (particularly from September).
This we expect to feed into sustained rally of Nigerian equities.
Nigerian equities enjoy best month in 4 months…Still room for upside?
In line with our expectations, the equities market recorded significant improvement in activity level as value traded on the local bourse (based on the benchmark All Share Index) surged 45.9% m/m to N64.4bn in September.
The surge in activity level reflected improved risk-on sentiment which fed buying appetite among investors. As a result, the bullish sentiments drove the local bourse higher by 6.0% m/m to settle at 26,837.42pts.
Furthermore, we note that since the end of Tuesday’s trading session (6 October 2020), NSEASI appreciated further by +4.92% and YTD stood at +7.70%. However, the concern for many investors who are yet to take position in the local bourse remains clear: “Is there further room for upside?”
We still expect to see the local bourse sustain the momentum till the end of the year. We note that several factors would still help sustain the rally.
We present key factors that would drive the market higher below:
On the monthly timeframe, the All Share Index (ASI) remains set for a bullish run as it is well below its 50-day SMA (30,767.96), 100-day SMA (31,815.51) and 200-day SMA (31,075.86) at 26,985.77pts.
As a result, while the market appears to have heated up in recent weeks, there remains a significant room for upside over the next 2 months as the index drives towards the 30,000pts mark.
From a relative valuation perspective, the All Share Index (ASI) remains undervalued relative to historical average and peers in other emerging and frontier markets. The ASI currently trades at a PE ratio of 10.09x which is a significant discount to its 5-year average PE ratio of 11.89x.
Finally, we note that the economy will still be bolstered with significant liquidity in the coming weeks which would force institutional and retail buyers to continue investing in cheap high dividend yield stocks.
Notably, OMO maturities of N1.6tn is expected to mature in October 2020. We recall that the liquidity from the N1.3tn OMO maturity in September supported activity level.