Recently released report by the Nigerian Stock Exchange (NSE) on domestic and foreign portfolio participation in equities trading showed that total equities market transactions decreased in May 2021 compared to the volume of transactions done in April 2021 as investors waited on the sidelines given the relative rise in interest rates, especially for 364-day treasury bills.
The stop rate for 364-day T-bill rose to as high as 9.75% in May from 9.00% at the beginning of April 2021.
Sell-offs by the domestic institutional investors were more intense, followed by retail investors.
Albeit, we witnessed slower outflows from the foreign portfolio investors.
Hence, the ratio of total domestic transactions to total foreign transactions tilted to 79:21 in the month under review, from 82:18 in April 2021 – total domestic transactions plunged by 41.70% while total foreign portfolio transactions only contracted by 27.59%.
Notably, total transactions on the Nigerian Exchange Limited (NGX) decreased to N97.19 billion in May 2021 (from N159.93 billion printed in April 2021); of which total domestic transactions dropped month-on-month (m-o-m) to N76.90 billion (from N131.91 billion).
The FPI transactions decreased marginally to N20.29 billion in May (from N28.02 billion printed in April).
A further breakdown of the FPI transactions in May 2021 showed that foreign portflio inflows fell to N13.01 billion (from 18.20 billion); also, foreign portfolio outflows moderated to N7.28 billion in May from N9.82 billion in April.
On the part of local investors, they reduced their stake in the equities market to take advantage of the rising money market rate, especially the domestic institutional investors – their transactions dropped m-o-m by 53.93% to N43.96 billion in May 2021.
Also transactions of the retail investors fell to N32.94 billion in the month under review (from N36.50 billion in April 2021).
Given the lukewarm approach of the domestic institutional investors as well as the retail investors, coupled with the sustained weakness in inflows from the FPIs, the NSE All Share Index (ASI) fell by 3.51% to 38,437.88 index points at the close of May 2021.
In another development, the President of the Dangote Group, Alhaji Aliko Dangote, stated that the company’s new fertiliser plant began operation in the month of June 2021.
He mentioned that the company would export its fertiliser, the first shipment, to Louisiana, in the United States, while the majority of the exports from the plant would be shipped to Brazil.
Dangote’s new fertiliser plant which is located at the Lekki Free Zone in Lagos State, has the capacity to produce three million tonnes of urea in a year that would also be supplied to all the major markets in sub- Saharan Africa.
According to the World Bank, Nigeria consumed about 20kg of fertiliser per hectare of arable land in 2018, lower than 73kg consumed in South Africa, and 393kg in China.
Meanwhile, in order to reduce the demand pressure on the foreign exchange, especially the USD, the Federal Government banned the importation of NPK fertiliser in November 2018.
In December of the same year, the Central Bank of Nigeria (CBN) also added fertiliser to the list of imported items that is ineligible to access foreign exchange from the official markets.
As the earlier rise in Treasury bills rates appears to be reversing and as CBN explores other avenues to stabilise foreign exchange rates, we expect the new development to have a positive effect on the real sector.
Given the declining trend in inflation rate, the southward movement in interest rates may, however, be slow as inflation still poses a threat amid worsening insecurity.
Hence, as the direction of yields takes a bearish turn, and as corporates prepare their books for interim-dividend payment, we expect investors’ participation in the stock market to improve in the third quarter of the year.