….And the CBN Floats the Naira. Effects of the new policy on your Equity investments

The CBN Governor Mr. Godwin Emefiele, announced a while ago, the long awaited modalities for the implementation of the flexible foreign exchange policy. The facts are as follows:

Introduction of a two way quote, which means that buyers and sellers will state prices and quantities they are willing to buy and sell.

·    The CBN also maintained that the 41 items banned last year for access to forex for imports remained banned. 

·     The CBN has also appointed primary dealers for the first time which is expected to help boost FX liquidity in the market.

·         The exchange rate will be market determined and the CBN will also participate in the market occasionally. 

·     The CBN also announced the introduction of new financial products such as FX Futures where businesses who need dollars in the near-distant future can now hedge by buying at a price today but get the dollars delivered when they actually need it.

·    Participants in the inter-bank FX market shall include Authorised Dealers, Authorised Buyers, Oil Companies, Oil Service Companies, Exporters, End-users and any other entity the CBN may designate from time to time.

·    Authorised Dealers shall buy and sell FX among themselves on a two-way quote basis via the FMDQ Thomson Reuters FX Trading Systems (TRFXT Conversational Dealing), or any other system approved by the CBN.

Click link for full CBN guideline

Our take on how this will affect your equities investment.

Analysts, investors and market watchers have long awaited this Flexible FX implementation strategy since its announcement after the last Monetary Policy Committee Meeting. As we are all aware, 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 (demand and supply).  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).  Also, local institutional investors like PFA’s 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% 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.

Our Recommendation

Based on our assessment, the CBN has taken a huge step in the right direction from an investment standpoint. It is our opinion that this new policy is positive for the equities market and will result in the resurgence of the market. As much as we are aware that this policy still requires fiscal responsibility to be effective, we are optimistic that this is the right step for the economy at this time.

We encourage our investors to take advantage of our weekly stock recommendations for this week, which has factored in all the unfolding economic events and realities to position their investment portfolios towards identified opportunities.

Chuks Anyanwu